GET THE MOST OUT OF YOUR IRA BY CHOOSING THE RIGHT BENEFICIARY AND DISTRIBUTION METHOD

 

If you inherit a traditional IRA, you are called a beneficiary. A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Since, an IRA grows tax free, there might be advantages to not taking a lump sum and only take the Required Minimum Distributions (RMD). 

 

Beneficiaries of a traditional IRA are taxed on distributions they receive as "income". With an Inherited Roth IRA, you don’t pay taxes on distributions.

 

In almost all cases, it is advantageous to name the primary and contingent beneficiaries whom you wish to inherit your inherited IRA.

 

You can also choose not to inherit the IRA; known as "disclaiming" the assets. This may be useful if you wish the benefits to go to someone else or don't want to pay taxes on the assets

 

How a beneficiary can take the inherited IRA

 

  • If beneficiary is the spouse, they have three choices:

    1. They can rollover the IRA and treat it as their own, subject to RMD's (See advantages of spousal rollovers)

    2. They can designate themselves as the account manager and treat it as their own

    3. Treat themselves as the beneficiary rather than treating the IRA as your own.

 

  • If the beneficiary is not the spouse, they have a few options:

    • They can take a lump sum (See lump sum)

    • They can withdrawal all assets within 5 years after death (see 5 year rule)

    • Or they can have the inherited assets placed in a Beneficiary IRA, and they withdraw a portion (RMDs) each year for as long as assets remain in the account (see life expectancy rule).

 

  • If the beneficiary is the trust, they need to meet certain requirements, and if they do, the general rule is that:

    • The trust is allowed to stretch distributions based on the life expectancy of the oldest underlying trust beneficiary

 

Advantages of Spousal Rollovers

 

  • By using a spousal rollover, the surviving spouse can use his/her own age and life expectancy for starting Minimum Required Distributions from the IRA. Often this can mean a longer period for tax deferral of the IRA.
     

  • With a spousal rollover, the surviving spouse can use the IRS Uniform Lifetime Table, based on joint life expectancies, rather than the Single Life table used for non-spousal beneficiaries of an IRA. The joint tables provide for a slower payout of required minimum distributions.
     

  • A spousal rollover allows a surviving spouse to name primary and contingent beneficiaries to the IRA. This allows the surviving spouse, if the situation warrants, to correct any problems in the original beneficiary designations. Naming beneficiaries for the spousal IRA can provide these beneficiaries with the option of using their own life expectancies for drawing down the IRA once they inherit it. If the spouse opts to inherit the IRA rather than executing a rollover, the distribution of the IRA must be distributed over the life expectancy of the original deceased owner for all beneficiaries who inherit the IRA.

 

 

A spouse, however, might decide to forgo a spousal rollover if he/she is under the age of 59 and 1/2 and has a clear need for the income from the IRA. As beneficiary, the surviving spouse is required to take minimum distributions from the account. Withdrawals would be exempt from the 10% early withdrawal penalty tax

 

Lump Sum Rule

 

Here, there is no new account set up and all assets in the IRA are distributed to you all at once. You will pay income taxes on the distribution all at once. You will not incur the 10% early withdrawal penalty. You may move to a higher tax bracket depending on the amount of the distribution and your current income level.

 

Five Year Rule

 

Here, you set up an inherited IRA account and then transfer the assets into that account held in your name. All the money is available to you at any time up until 12/31 of the fifth year after the year in which the account holder died, at which point all assets need to be fully distributed. You are taxed on each distribution. You will not incur the 10% early withdrawal penalty. Undistributed assets can continue growing tax-deferred for up to five years. You may designate your own IRA beneficiary.

 

 

Life Expectancy Rule when inherited from someone other than your spouse

 

If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.

 

Like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries (required minimum distributions are determined by the IRS Single Life Expectancy table, see IRA Distribution Tables).

 

Executors have until December 31 of the year following the death of the decedent owner to properly title and distribute the IRA to the beneficiaries. Multiple beneficiaries should split the IRA into separate interests

 

 

IRS deadlines for minimum distributions if Owner died BEFORE required beginning date

 

  • The deadline for a sole beneficiary:

    • RMDs must begin no later than December 31 of the year in which the IRA owner would have turned 70½. However, you can begin withdrawals earlier.

  • The deadline for more than one beneficiary:

    • RMDs must begin no later than December 31 of the year after the year of death. However, you can begin withdrawals earlier.

 

How much to withdraw each year. Determine the RMD amount by dividing the prior year’s 12/31 balance of your Beneficiary IRA by your single life expectancy factor.

Your single life expectancy factor is recalculated each year.

 

IRS deadlines for minimum distributions if Owner died AFTER required beginning date

 

RMDs must begin no later than December 31 of the year after the year of death.

 

How much to withdraw each year. Determine the RMD amount by dividing the prior year’s 12/31 balance of your Beneficiary IRA by the longer of either:

 

  • Your single life expectancy. Your single life expectancy factor is recalculated each year.

-OR-

  • The remaining single life expectancy of the IRA owner. The life expectancy factor is reduced by one each year.

 

CALL ESTATE PLANNING  ATTORNEY KRIS CRAWFORD

IN MENIFEE TODAY

 

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Plan ahead and call Menifee Estate Planning  Attorney Kris Crawford today (951) 229-0757

IRA BENEFICIARIES

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