Inheriting an IRA means different things to different people. Everyone shares in the grief of a departed loved one, but the options available to those beneficiaries are very different. Spousal beneficiaries have options to treat the IRA as their own or can keep the account in the original owner's name. Non-spousal beneficiaries must keep the account in the original owner's name and are subject to different distribution rules that depend on the age of the original owner. Non-spousal beneficiaries have fewer options than a spousal beneficiary, however, they both may be treated the same under certain circumstances. The important thing is to take some time to review where things are at and get answers to a few questions. The answers provide guidance on the options available and the course in which distributions must follow.
Issue/Question #1: What type of IRA is this? A traditional IRA is taxable to the beneficiary when distributions are made (not including any non-deductible contributions), while a Roth IRA has tax-free distributions to a beneficiary (as long as the distribution is qualified). Either type of IRA can be retitled by a spousal beneficiary and treated as their own account. A non-spousal beneficiary will need to begin taking distributions before December 31 of the year following the year of death. Keep in mind that owners of Roth IRAs are not subject to required minimum distribution (RMD) rules.
Issue/Question #2: How old was the account owner? This will let the beneficiary know if RMDs are in place (or should be). It also lets the beneficiary know which life to use as the basis for lifetime distributions. [NOTE: RMDs (if applicable) should be made for the year of death before anything else occurs].
Issue/Question #3: Multiple beneficiaries. If an IRA has multiple named beneficiaries, the treatment can follow above as noted. The same would apply to a qualified trust if it were named as the beneficiary (assuming multiple trust beneficiaries). If the beneficiaries are not specifically identified (i.e. my children) or the IRA does not properly split between the beneficiaries, then the life expectancy of the oldest beneficiary will be used to determine future distributions. If an unqualified beneficiary is named, distributions may be required to be made within five years after the year of death. If the multiple beneficiaries include a charity and individuals, the non-person beneficiary must be paid out by September 30 of the year following the death of the account owner. If not, the five year distribution rule may apply.
Other issues to be aware of:
Inheriting an IRA has numerous pitfalls to watch out for. Done correctly, the inherited IRA can provide many years of steady income. Done improperly, the benefits of tax-deferred growth (and possibly tax-free growth for a Roth IRA) will be lost. The good news is that you have some time to settle down and seek out proper advice before making these decisions. For more information on inheriting an IRA, contact your local UHY LLP professional.
Wednesday, April 24, 2019 | 7:30 AM – 9:30 AM EDT | The Hartford Club