If you leave an IRA to your children or to someone other than your spouse, certain benefits can be lost without careful planning.
An Inherited IRA Stretches the Tax Benefits
Surviving spouses who inherit IRAs are permitted to roll them into their own IRAs, allowing the funds to continue growing tax-deferred or tax-free until they are withdrawn in retirement or after age 70½.
Beneficiaries other than your spouse, such as your children, are treated differently.
To take full advantage of an IRA’s tax benefits, nonspouse beneficiaries must transfer the funds directly into an “Inherited IRA.” Although the beneficiaries will have to begin taking distributions by the end of the following year, they’ll be able to stretch those distributions over their life expectancies, allowing earnings to grow tax-deferred or tax-free as long as possible.