An IRA account can be passed on by its owner to a spouse or a non-spousal beneficiary when the owner dies. But the treatment of the two types of beneficiaries is different, and knowing the differences can mean significant tax savings. Advisors recommend making a plan to handle an IRA account inherited from someone other than a spouse.

One main difference between an IRA account inherited by a spouse and one inherited by a non-spouse is that the spouse can roll it over into either an existing or a new IRA account and continue contributing to it. If the spousal beneficiary is below the age of 59½, he or she can take funds from the inherited IRA without paying a 10 percent penalty for early withdrawal.

Previously, non-spousal beneficiaries had no other option but to take a lump sum distribution from an inherited account and pay the tax consequences. This is no longer the case. Under the Pension Protection Act, a non-spousal beneficiary can also roll over an inherited account, but only directly (trustee-to-trustee transfer) to a new IRA account. The non-spousal beneficiary will not be subject to taxes on the inherited IRA until he or she receives distributions from the account.

However, the new account cannot be in the non-spousal beneficiary’s name, and the beneficiary cannot make any contributions to the inherited IRA. For instance, the new account could be in the deceased IRA account owner’s name: John Smith, deceased, IRA f/b/o Jane Anderson (beneficiary).

The direct rollover must take place by Dec. 31 following the year of the death of the IRA account holder. However, if the inherited IRA has a stretch option, the rollover can occur anytime after the account owner’s death  —  as long as the non-spousal beneficiary took out the required minimum deductions.

In the case of a non-spousal beneficiary, any required minimum distributions made by the deceased owner are deducted from the total amount that may be rolled into the new IRA. If the owner of the IRA died before making the required minimum distributions, the IRS may use either the five-year rule or the life expectancy rule to determine how much must be taken out before rolling the remainder into the new IRA.

The IRS rules that apply to inherited IRAs and rollovers are complicated, and it’s best to consult an accountant or financial planner.

Every year the government rolls out new tax breaks, but too many taxpayers fail to take advantage of them. As a result many Americans pay higher taxes than they should. Tax rules also change, and missing out on these amendments could cost taxpayers dearly. This is why it’s important to do your tax planning way ahead of time instead of waiting for the last possible moment.

Here are some of the tax tips for 2010 that you should consider:

• $16,500 tax-free 401(k) maximum contribution limits. The IRS is holding the maximum amount an employee can contribute to a 401(k) in 2010 at $16,500. Catch-up contribution will remain unchanged from 2009 at $5,500 for individuals over the age of 50. The contribution limits are set annually based on the inflation rate in the third quarter vs. the previous year’s quarter. This is good news since many were expecting the IRS to reduce the limit.

• The return of the RMD. The required minimum distribution (RMD) was eliminated last year for taxpayers who are at least 70½ years of age. In 2010 RMDs are back. If you fail to withdraw an RMD, fail to withdraw the full amount of the RMD or fail to withdraw the RMD by the applicable deadline, you will have to pay a 50 percent tax on the amount not withdrawn.

• Income limits for Roth IRA conversions eliminated. Starting this year the adjusted gross income limit of $100,000 and the filing status requirement have both been abolished. Anyone is now eligible to convert a traditional IRA or any other retirement plans from a previous employer to a Roth IRA. When you make a conversion, the conversion amount counts as ordinary income. For this year, however, you have the option to recognize 50 percent of the conversion amount as ordinary income in 2011 and the other half in 2012.

Starting this year, thanks to a provision in the Pension Protection Act (PPA), qualified payouts from annuities with a tax-qualified long-term care insurance (LTCi) rider are now income-tax-free. The new tax treatment of these combination or hybrid products has been hailed as one of the most significant events affecting the insurance industry in years.

The new rule dramatically enhances the value of LTCi. For instance, a hybrid annuity contract purchased in 2010 for $100,000 grows to $250,000 over the years. If the insured requires qualified long-term care, he or she can withdraw the entire $250,000 without paying income tax on it. Another provision under the PPA says the $150,000 gain on the original value can be tax-free as well. If the insured needs only a small amount to cover qualified long-term care, the fund will be taken from the principal rather than from any gains.

The favorable tax treatment applies to payments from reimbursement contracts where insureds submit claims and are paid for qualified LTC benefit expenses incurred. These payouts are totally income-tax-free.

For contracts where carriers pay a fixed daily or monthly benefit regardless of the expenditures actually incurred, the Internal Revenue Code stipulates a per diem rate or other periodic basis. For 2010 the limit on the exclusion for payments made is $290 per day. So an insured could collect payouts of $8,700 monthly (assuming a 30-day month) tax-free. Any amount above that is taxable.

People who already own annuities or life insurance can use the 1035 exchange to acquire a hybrid annuity with an LTCi rider without paying any taxes. Basically, the insured switches from a tax-deferred to a tax-free vehicle when funds are used to pay for LTC expenses.

For instance, an annuity holder exchanges an existing variable annuity originally purchased for $100,000 that now has a value of $400,000 for a combo product with a rider that adds $200,000 of LTC protection. All portions of gain paid out from the hybrid contract to reimburse LTC expenses will be income-tax-free.

It is important to note that any existing policy with a death benefit or income guarantee will be forfeited in such an exchange. Any surrender penalty that applies should also be taken into consideration.

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The legal and tax information contained in these articles is merely a summary of our understanding and interpretation of some current provisions of tax law and is not exhaustive. Consult your legal or tax advisor for advice concerning your particular circumstances.