The choice of beneficiaries for your IRA or other retirement plans is one of many financial decisions that must be made during your lifetime. Generally, the goal is to maximize the deferral period so that the account can continue to grow tax deferred as long as possible. Here is a quick rundown of the rules applicable to different types of beneficiaries.
Surviving spouses are the most common beneficiaries and generally get the most favorable treatment. A surviving spouse can:
- Elect to treat an IRA as their own if they are sole beneficiary
- Defer Required Minimum Distribution (RMD) until the year the decedent/owner would have turned age 70 ½. The spouse would then take RMDs based on their own life expectancy.
The timing of RMDs for non-spouse beneficiaries varies depending on whether the decedent had already begun taking RMDs themselves. When an owner dies before this point, RMDs for a non-spouse beneficiary can be calculated over the beneficiary’s life expectancy. When the owner dies on or after their required beginning date, RMDs for the non-spouse beneficiary will be calculated based on the longer of the beneficiary’s life expectancy or the deceased owner’s remaining life expectancy. Distributions would be required to start by December 31 of the year following the owner’s death.
If there are multiple beneficiaries, the life of the oldest is generally used but this can be avoided by splitting the IRA into separate accounts. Then each individual beneficiary can take distributions based on their own life expectancy. Splitting the account is especially crucial if there is a large age gap between beneficiaries.
It is also important to name contingent beneficiaries. These individuals would be next in line to receive the IRA assets if the primary beneficiary dies or disclaims their interest. IRAs that include a non-person beneficiary such as a trust or charity must take out that entity’s share of the IRA by September 30 of the year following the owner’s death.
These are just some of the general rules applicable to this very complex area of tax law. For more information on inherited IRAs, please call my office.
David K. Raye, CPA, P.C. 704-887-5298 www.davidrayecpa.com
*The information in this blog post is general in nature and not intended as specific advice. Please consult a tax advisor to see how this information applies to your specific situation.
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