Why must I take distributions from my inherited IRA?
Inherited IRA
plans are not intended to permanently shelter IRA distributions
from income taxes. Instead, they are intended to provide for the
retirement of the IRA holder or, after they have died, for the
support of their beneficiaries. As a result, the IRS has
established IRA distribution rules so that investments will be
depleted over the course of the IRA holder's or beneficiary's life
expectancies. These rules are known as required minimum
distributions (RMDs).
What if I miss a RMD from an inherited IRA?
If an
IRA beneficiary
does not take an RMD by the applicable deadline the beneficiary is
subject to a 50% penalty on the amount that should have been taken
out. If a spouse is the sole beneficiary of an inherited IRA and
they miss an RMD, there is usually an added consequence. If this
occurs, the IRA ceases to be a beneficiary IRA and is now looked at
as the surviving spouse's own IRA.
What types of factors are considered for determining the
distribution alternatives available for the beneficiaries of the
inherited IRA
following the death of an IRA holder? Many factors can impact what
distributions options are available to an IRA beneficiary following
the death of the IRA holder, however, there are three primary
factors that must be considered:
3 Primary Inherited IRA Factors
- age of the IRA holder at the time of their death
- beneficiary's relationship to the deceased IRA
holder
- Whether or not the beneficiary in question was the sole
beneficiary of the IRA
Inherited IRA Rules and Income Options
Five-Year Rule:
Under the 5 year rule, the beneficiary of an
inherited IRA
can usually take distributions in any amount at any time. Keep in
mind, the beneficiary must totally deplete their portion of the IRA
by no later than the end of the year containing the fifth
anniversary of the IRA holder's death.
With an Inherited IRA, what does to recalculate or not
recalculate my life expectancy mean?
The tax regulations governing
inherited IRA
distributions provide two basic methods for determining their life
expectancy factors. These methods are known as recalculation and
non-recalculation.
When looking at the recalculation method, an IRA holder looks up
a life expectancy table used for calculating required minimum
distributions. This life expectancy table is provided by the IRS,
and can be found on their website.
On the other hand, the life expectancy factor in the
non-recalculation method, is looked up in the life expectancy table
for the first distribution year, just like when a person uses the
recalculation method. However, in the following years, one year is
subtracted from the original life expectancy for each passing year
since the first beneficiary distribution year, rather than going
back to the table each year. Always keep in mind that the life
expectancy of beneficiaries who are not spouses must always be
determined using the non-recalculation method.
Life Expectancy Payments:
Under this option, an IRA beneficiary must begin to take income
based on their life expectancy by no later than the end of
the year following the year of the IRA holder's death. Spouse
beneficiaries may wait until December 31 of the year the deceased
IRA holder would have turned age 70½ to begin taking distributions
under this rule.
What inherited IRA distribution options are available when a
deceased's estate is named as the beneficiary of their
IRA?
The options for distributions available to an estate as the
beneficiary of an
Inherited IRA
vary depending on whether or not the IRA holder died before their
required beginning date. If the IRA holder has died before their
required beginning date, the assets in the IRA may be paid to the
estate using the five-year rule. If the account holder died on or
after their required beginning date, the estate can take
distributions over the remaining life expectancy of the deceased
IRA holder.