Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

What will happen to the assets of an IRA if the account holder dies?

1. Funds become part of the estate

2. They are automatically liquidated

3. The beneficiary can inherit the IRA

4. The account is frozen indefinitely

The correct answer is: The beneficiary can inherit the IRA

When an IRA account holder passes away, the assets within the IRA do not simply become part of the decedent's estate, nor are they automatically liquidated, nor is the account frozen indefinitely. Instead, the assets are distributed to the named beneficiary of the IRA. This designed mechanism allows the beneficiary to inherit the IRA with certain tax advantages that can vary depending on the beneficiary's relationship to the decedent and their age. Beneficiaries can choose how to handle the inherited IRA, such as taking distributions over their life expectancy or rolling it over into their own IRA if eligible. This inheritance process is a significant incentive for many to keep their retirement accounts updated with the correct beneficiary designations to ensure the intended party receives the funds efficiently and in a tax-favorable manner. Other scenarios, such as the funds becoming part of the estate or the account being frozen, do not directly apply when there is a designated beneficiary, making the ability to inherit the IRA the correct and most relevant outcome in this context.