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Investment Planning |
Inherited IRAs (Non-Spouse Beneficiaries)
When an IRA account owner dies, the primary beneficiaries (or contingent beneficiaries, if the primary beneficiary is deceased) inherit the IRA, trumping the will and bypassing probate. If you find yourself a beneficiary in this situation, use the IRS’s Single Life Expectancy table to determine your lifetime required distributions. Your new IRA will be an "inherited IRA," meaning it was not inherited by a spouse.
Non-spouse beneficiaries of Roth IRAs are subject to the same required minimum distribution (RMD) rules as traditional IRAs. However, post-death Roth IRA distributions are generally tax-free, as long as the owner held the account for at least five years (beginning on the first day of the first year in which a contribution was made).
If the decedent had already started taking RMDs, then beneficiaries must implement one of two choices before September of the year following the individual’s death: Either take the RMDs as a lump sum, or take the RMDs according to your age (as the beneficiary) in the Single Life Expectancy table. (In subsequent years, you need not refer to the table. Instead, you can reduce your original factor by 1 and continue to do so each year after.)
If the decedent died before taking any RMDs, then the beneficiaries also have the option of a five-year grace period, regardless of IRA type. This option allows the beneficiary to wait five years before taking any distributions. But at the end of the fifth year, the beneficiary must withdraw all of the assets.
Non-spouse IRA beneficiaries should note the following:
- The inherited IRA must be properly titled, and the deceased IRA owner’s name must remain on the account. However, the beneficiary's Social Security number will replace that of the deceased.
- Name your own successor beneficiaries with the IRA custodian.
- If one of multiple beneficiaries of the deceased’s IRA happens to be a charity, the IRA must be split (or cashed out) by September 30 of the year following the date of death, or else the IRA will be deemed to have no designated beneficiaries and must be immediately distributed.
- Additional rules apply if the deceased IRA owner did not take a year-of-death RMD.
- Any basis (from post-tax contributions) in the inherited IRA will be tax-free upon distribution.
- If any estate tax is paid, be sure to claim the income in respect of a decedent (IRD) deduction. Note that in 2010 the unified credit is temporarily eliminated; by January 1, 2011 (and possibly earlier), the estate tax is expected to be reinstated with an exemption equivalent of $1 million.
Tips Disclaimer
These tips contain information that may change over time as a result of new tax legislation. Although we make efforts to keep this information current, you should check with your tax advisor before taking action based upon any information contained in these tips.