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Self Directed IRA Beneficiary Guidelines

Video Highlights

[0:17] Terry takes a look at a real-life example from a client who has a beneficiary IRA.

[0:54] How can you plan for your IRA in the event that something happens to you?

[1:24] What does a beneficiary do with an inherited self-directed IRA?

[1:50] Here’s how the inherited IRA can go into a newly created IRA account.

[2:23] There are 3 IRA beneficiary options for a spouse.

[3:05] What if you are a non-spouse beneficiary?

[3:23] A beneficiary should figure out what type of assets are in the IRA.

[3:51] This is an inherent downside of a self directed IRA account.

[4:26] Here’s one crucial question you should ask yourself about your beneficiary.

[5:07] How can you learn more about providing for your loved ones?

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Self Directed IRA Beneficiary Rules

Unforeseen tragedies can often leave IRA beneficiaries in the dark when it comes to inheriting the deceased’s retirement account. However, there is a light at the end of the tunnel. There are a few steps we will discuss this week, and other similar topics next month that will help point the new owners of the inherited IRA in the right direction. Next month specifically, we will provide the current account holder with practical tactics to prevent such havoc for the beneficiaries in the future.

This week we’ll discuss the beginning steps for a beneficiary who has just inherited an IRA, how to handle your new account and the assets.

Inherited IRA for Spouse

For instance, a client has a couple LLC’s in his IRA when he passes away unexpectedly. The IRA is passed to his beneficiary, his wife, in this case, who decides to form an inherited IRA account and treat the IRA as her own.

What’s the next step?

First, she would need to provide the custodian with the death certificate and complete the Inherited IRA Application form. Once these are received by the custodian they can transfer the assets, in this case the LLC’s, to the new account.

Note: The custodian is directed to buy membership units in the LLC and instructed to transfer a dollar amount only, so it is likely that they will not have a complete list of all the assets bought and held within the LLC, but it doesn’t hurt to ask.

Once the assets have been transferred to a new Inherited IRA account, these are options of how to handle the account:

  1. Take the IRA and treat it as own IRA.
  2. Take it all out at one time (lump sum)
  3. Take IRA distributions out over 5 years.

Inherited IRA for Non-Spouse Options:

  1. Take IRA distributions out over 5 years.
  2. Take it out distributions over beneficiary’s lifetime.

Spousal Beneficiaries and Non-Spousal Beneficiaries

We recommend you speak with a trusted CPA or tax professional for guidance to help you make the best decision based on your specific circumstances. There are always nuances in every situation that point you toward the best option.

Determine IRA Assets

No matter how you decide to treat the IRA the next step should be the same: determine the assets that are held in the LLC.

  • What are they?
  • Are they generating profit?
  • Can I liquidate assets if I need to?
  • How marketable are the assets?
  • How much knowledge do I have about the assets?

This step may take some time and effort, but will give you peace of mind.

Self Directed IRA Account Holders

On the other hand, if you currently have a self directed IRA, you can be proactive and speak with your beneficiaries beforehand. Preparing your beneficiary for any situation ahead of time will save them a ton of headaches in the wake of their heartache. After the untimely death of a family member, the last thing you want to deal with are unfamiliar finances. Be prepared and leave your beneficiaries prepared as well.

This is never an easy topic to talk about, and it’s even harder to implement into our game plan, but it’s important to leave our friends and families with a legacy, something to be proud to pass down, not problems.

Next month we will expand on Taking Care of Your Loved Ones with tips and advice to leave your loved ones the type of inheritance that you’ve always imagined.


The last couple of weeks, initially, we talked about setting goals in your IRA. And then we talked about if you even are a candidate, a good candidate for a self-directed IRA. This week, we had an email from a client that was the beneficiary of one of our client’s IRAs and the email basically said, “You know, I inherited this IRA and it’s got a couple of LLCs in it. What are those?”

In our situation, we don’t necessarily know what the investment is. We were instructed by the account holder to purchase membership units in an LLC. We don’t know exactly what that LLC does necessarily or what type of investments that LLC has made.

That brings up the idea of planning. Again, it’s keeping in mind what you want to do with your IRA and then also keeping in mind what your beneficiaries may do with your IRA in the event something happens to you. It’s a fact that we don’t want to face, but eventually, we’re not going to be here and whoever we have as our beneficiary in our IRA is going to have to figure out what to do.

So just kind of the basic overview of what a beneficiary of an IRA does is initially, the very first thing they need to do is get a hold of their custodian, provide them with a death certificate and they will have to set up what’s called an inherited IRA. That’s a requirement.

Provide them with a death certificate, so then the custodian will look to see who the beneficiary is. Then that beneficiary will create an inherited IRA and the assets from the deceased account holder will go into the inherited IRA.

Now, there are several options depending on who the beneficiary is that they will have. I’ll tell you what those options are, but most importantly, they need to get a hold of the CPA or tax professional to determine what their best option is and also determine which of those options apply to them given their specific situation.

So first off, if you’re a spouse, as the beneficiary, or the spouse of the account holder, you have basically three options. Number one is you can take that IRA and treat it as your own. You can just move it into your own IRA and it’s like it was yours from the very beginning and you do whatever you want to do with it.

Number two is you can take it all out at one time. You could take all the money out. You would end up paying taxes on it at that time if it’s a traditional account. With a Roth account, you might not depending on circumstances, but you can just take it all out in a lump sum.

The third thing you can do is take it out over five years. Now, that’s if you’re a spouse.

The other beneficiary would be a non-spouse beneficiary and they have just two options: take it out over five years or take it out over their lifetime.

The first thing you need to do is contact the tax professional to determine which is the best alternative for you. Once you’ve made that decision and you figure out what you want to do as far as how you want to take the money out, then you need to look at the assets that are within the IRA and figure out what they are.

If you’re going to take it out, do you need to liquidate them, so that you can pay taxes, if it’s a traditional account? Can you take them out in kind? Do they generate income? There are just a lot of things you need to look at.

That’s one of the downsides of a self-directed account. These are not necessarily marketable type investments.  So just saying, “Hey, I want to liquidate the asset in this account may not be as easy as you think it is. We’ve talked about that in other videos. So you need to decide what you’re going to do there and then find someone that can help you go in that direction.

As the beneficiary, that’s what you need to do. As the account holder, you just need to think ahead. Keep in mind, although we never want to think about this, keep in mind what my beneficiary would do in the event they inherit this account. Maybe talk to them about what they might plan on doing, who they might talk to or what direction they might go.

We talked about setting goals the first Tuesday at Two of this month, the month of January 2015. We talked about whether you’re even a candidate for an IRA or a self-directed IRA or if you should have a self-directed IRA.

Today we’ve talked about what the beneficiaries might do, how you might look ahead to what you want to tell your beneficiary they might look into doing, and the options they have if they become a beneficiary.

Next month, we’ll be moving into Valentine’s month, February, so we’re going to be talking about providing for your loved ones. That is going to, again, include some inherited IRA’s. It’s going to include the possibility of setting up accounts for your children. I hope you stay tuned, watch the videos next month and we’ll be talking about that.

If you don’t get these videos, if you’re not a subscriber to our channel, subscribe to our channel and you’ll get emails telling you when the new videos come up. Stay tuned for every Tuesday at Two and we’ll be providing you with some more information then.

Self Directed IRA Beneficiary Guidelines was published on:

Terry White

About Terry White

I started my business career after getting my degree in Accounting from the University of New Mexico in 1983. My first job was as a controller for a local title company, and in 1987 I started First Financial Escrow, Inc. Over the years I played a part in several startup companies including First Financial Equities, Inc., First Financial Trust, Inc., First Financial Marketing, Inc. and Asset Ventures, Inc. In 1997 First Financial Escrow, Inc. was able to purchase the escrow accounts from Sunwest Bank and changed its name to Sunwest Escrow. As the market changes, Sunwest has grown and changed along with it. Besides my wife, Sheila, we have three boys, two daughters-in-law, one grandson, another grandson on the way and a future daughter-in-law. Sunwest is my passion, and I enjoy coming to work every day to see what will happen next. I enjoy fly fishing, spending time in Colorado, biking and watching my boys play soccer.