An inherited IRA is an IRA that remains in your name after your death for the benefit of your beneficiary. It is the way to allow your beneficiary to take distributions over his or her life expectancy (if a Designated Beneficiary).
The law does not allow a beneficiary (other than your spouse) to roll over your IRA into his or her own IRA. To do so, would be taxable event to the beneficiary. Instead, the beneficiary must keep the IRA title in your name. For example, your name is John Smith and your beneficiary's name is Jane Wilson. After your death, your IRA account should be titled something like: John Smith IRA, deceased, for the benefit of Jane Wilson.
This ability to leave the IRA in a tax deferred environment helps to create the opportunity for a significant amount of wealth to be generated without being subject to income taxation on an annual basis.
Excerpt from The Complete Guide to Estate and Financial Planning in Turbulent Times (Collaborative Press, 2011) - Walt Dallas, Contributing Author
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