Low-risk investments commonly found in IRAs include certificates of deposit, Treasury bills, U.S. and U.S. savings bonds, and money market funds. Mutual funds, in particular, are a popular choice for IRAs because of the diversification they offer.
IRAs allow you to make tax-deferred investments to provide you with financial security when you retire. So what's the catch? There are quite a few. If you violate any of the IRS rules governing these accounts, the penalties can be quite severe, up to the disqualification and taxation of your entire account. Fortunately, the original owners of Roth IRAs are exempt from the RMD rules, but beneficiaries who inherit a Roth IRA are generally required to accept distributions, and those rules depend on several factors.
For example, a spouse who inherits an IRA and has many years before reaching RMD age may consider transferring those assets to their own IRA. Moving from a traditional IRA to a Roth IRA might make sense if you think you'll be in a higher tax bracket when you start withdrawing funds, can pay conversion tax from outside sources, and have a reasonably long time horizon for assets to grow. Form 5498 Reporting incorrect information on Form 5498, Information on IRA Contributions, can cause taxpayers to make mistakes when reporting the IRA on their tax returns. However, once you've calculated your RMD for each traditional IRA account, you can add up the total and deduct it from one or more IRAs in any combination, as long as you withdraw the total amount required.
For example, naming a beneficiary to a trust instead of a spouse eliminates the surviving spouse's ability to transfer the IRA in their name to take advantage of the IRA's ownership rules. For example, if your will states that your IRA will be for your daughter, but your sister is listed in your IRA account as a beneficiary, your daughter may not receive the funds.