Self-directed IRAs not only accrue tax-advantaged or tax-free earnings, but they can also be passed down to a beneficiary without probate. Inherited IRAs
can be an excellent way to avoid probate court and leave your beneficiaries money, without the hassle and expenses of transferring the money through probate (FindLaw.com).
Most trust accounts require probate upon the account owner’s death in order for the beneficiary to access the account’s assets. Probates can be both time consuming and costly for the beneficiary, sometimes taking up to 5% of an estate’s value (NOLO.com).
Beneficiaries of an Inherited IRA can avoid the probate process all together. This includes both pre-tax plans like Traditional, SEP, SIMPLE, and 401(k) plans, and post-tax plans like a Roth IRA. With a Roth IRA, since contributions made by the original account owner into the account are made post-tax, the IRS does not collect taxes on the distributions. This means the beneficiary is not held responsible for paying taxes on any of the money distributed from the Inherited Roth IRA.
By the same token, unlike pre-tax retirement plans, Roth IRAs do not have required minimum distributions. Because taxes were already collected on the account’s contributions, the IRS is not concerned about ensuring the original IRA owner distributes and pays taxes on account earnings after they reach retirement age.
Self-directed IRAs can be invested in a wide array of assets, not just bank or brokerage-house securities. Assets like real estate, precious metals, private equity, and private loans can all gain earnings and be passed down to a Roth IRA beneficiary tax-free. The beneficiary can then decide how to manage these assets for themselves.
Self-directed Inherited IRAs do have special distribution rules based on whether or not the beneficiary is a spouse or non-spouse, and the structure of the account. Read about the details of self-directed Inherited IRA distributions here.