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Getting to the Bottom of Inherited IRAs

| December 26, 2017
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Naming a beneficiary for your traditional Individual Retirement Account (IRA) need not be a difficult task. Most people choose their spouse, if married, or another loved one. However, the rules governing the distribution of IRA assets to beneficiaries are not as simple. They generally involve two separate issues: 1) the age of the IRA owner at the time of death, and 2) the identity of the IRA beneficiary.

Under IRS regulations, taxpayers who own an IRA must begin taking required minimum distributions (RMDs) by April 1st of the year following the calendar year during which they reach age 70½. If an IRA owner dies before RMDs have begun, a spousal beneficiary can choose to withdraw all IRA assets within five years, to maintain the IRA under the deceased spouse’s name, or to treat the IRA as his or her own.

Suppose Alan (a hypothetical case) dies and his wife, Monica, is the beneficiary of his IRA. If Monica maintains the IRA in Alan’s name, minimum distributions do not have to begin until December 31st of the later of 1) the year following the year of Alan’s death, or 2) the year in which Alan would have reached age 70½. However, distributions would be based on Monica’s life expectancy. If Monica chooses to treat the IRA as her own, she is entitled to name new beneficiaries, and the rules governing RMDs would be the same as if the IRA were originally her own. Therefore, distributions would have to begin by April 1st of the year after the year in which she turns 70½, and the required amount would be based on her life expectancy. 

If Alan were to die after RMDs had begun, the options for Monica would be different. She could choose to continue receiving distributions based on Alan’s life expectancy or her own, whichever is longer. As another option, Monica could opt to roll over Alan’s assets into her own IRA. (Note that this option is not available for IRAs that have been annuitized.) 

Suppose Alan had named his son, Ryan, as the beneficiary of his IRA. Nonspousal beneficiaries may not treat IRAs as their own and cannot name additional beneficiaries. If Alan were to die before RMDs had begun, all assets in the account must be distributed by the end of the fifth anniversary year of his death. Alternately, Ryan may elect to receive distributions over his own life expectancy. The amount of distributions is based on Ryan’s life expectancy, and distributions must begin by December 31st of the calendar year immediately following the calendar year of Alan’s death. If Alan were to die after RMDs had begun, the assets must be distributed over a period not exceeding the larger of Alan’s or Ryan’s life expectancy. 

Be sure to consult your qualified tax professional for more information about inherited IRAs.

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