When a non-spouse is named the beneficiary of an IRA, he or she has several options as to how to receive the IRA inheritance.
If the account holder was over 70 ½, the first thing that should be done, prior to making any distributions, transferring any assets or retitling any accounts is to make sure that the account holder’s Minimum Required Distribution was taken in the year of death. Once that has been completed, the beneficiaries have multiple alternatives to choose from.
Retitle the account as an Inherited IRA
This option is going to be the most advantageous from a tax perspective as funds that remain in the account will continue to be tax-deferred until they are withdrawn. Funds can be accessed immediately, without penalty, regardless of the age of the beneficiary. The account will be subject to Minimum Required Distributions beginning the year after the year of death, although more than the minimum can be withdrawn. The amount of the Minimum Required Distribution will be based upon the beneficiary’s life expectancy.
If the account owner was under age 70 ½, rather than taking Minimum Required Distributions, the beneficiary can choose to distribute the entire account within 5 years. It is important to note that if the beneficiary does not take the first distribution by December 31st in the year following the year of death, it is assumed that the 5-year method was elected.
If there are multiple non-spouse beneficiaries of the IRA, the beneficiaries can elect to divide the IRA into separate Inherited IRAs for each beneficiary. This must be done by December 31st of the year following the year of death. If this is going to be done, the custodian should be informed by September 30th following the year of death. If the account is split into multiple Inherited IRAs, the life expectancy of each individual beneficiary can be used to calculate the Minimum Required Distribution of his or her respective IRA. If the account is not split, the Minimum Required Distribution will be calculated based upon the age of the oldest beneficiary.
Lump Sum Distribution
The entire account is distributed to the beneficiary(ies). This is going to be the most unattractive from a tax standpoint as income taxes will be due upon distribution and the benefits of tax deferral will be lost.
As you can see, there are several options available to non-spouse IRA beneficiaries. There can be substantial tax considerations associated with each option as well as long-term repercussions regarding asset transfers. As always, the professionals at Core Wealth Management are available to assist you to make the best decision given your particular circumstances.
Core Wealth Management is a fee-only wealth management firm located in Jupiter, FL. Our CFP® professionals provide investment management, financial planning and advisory services, while always strictly abiding by the highest fiduciary standards. For more information, contact us today at 561-491-0231.
Jackie Goldstick, CFP® is the Director of Financial Planning at Core Wealth Management. She is a member of the National Association of Personal Financial Advisors (NAPFA) as well as the Financial Planning Association (FPA).