Non-spouse beneficiary Options

[Lori Foresz]

I am trying to figure out a non-spouse beneficiary's options regarding an inherited IRA. It looks like the beneficiary can defer distributions under December 31 of the year following death and then may be able to (if the document allows) take periodic distributions over his/her own life expectancy to avoid a one-time taxable distribution of the full IRA amount.

Also, I understand the IRA document may not allow this and could require the entire amount be distributed to the beneficiary within 5 years of death. But, in any event, the beneficiary could have done nothing for at least a year following death.

Can someone confirm my understanding is correct?

Many thanks

[Guest jusducki]

My understanding agrees with yours - i've recently completed three for adults whose mother left her IRA to them. Each transferred their share to an investment firm, establishing the account with their mother's name and their name listed as the beneficiary (using their ss#). Once the account was established, they each took a RMB, based on their own date of birth. Their distribution had to be completed by 12/31/04 since their mother died in fall, '03. They had five years to decide and, at the end of five years, if nothing had been decided, a lump sum would have been paid to them. The amounts received as the RMD will be treated as fully taxable and the RMD will be recalculated annually.

[mbozek]

Making payments under separate IRAs based upon the life expectancy of the each beneficiary is permitted if the decedent's IRA beneficiary designation created separate shares in the IRA for each beneficiary. Otherwise the MRD must be paid based upon the age of the oldest beneficiary.

[ElGuapo]

They had five years to decide and, at the end of five years, if nothing had been decided, a lump sum would have been paid to them.

And I'd be careful telling clients they have five years to decide, since by then they've missed RMD deadlines and in effect have already decided to take a lump sum.

[Mary Kay Foss]

The five-year rule only applies if the IRA owner died before reaching the required beginning date. If the owner was taking RMDs, a beneficiary that does not take a distribution in the year following the death is subject to a 50% penalty.

If someone is indecisive, they can take the minimum amounts based upon life expectancy for a few years while they're deciding if they want to take them more rapidly. That may be a good idea for all beneficiaries, even those that could use the 5-year rule.