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Getting to the Bottom of Inherited IRAs

Getting to the Bottom of Inherited IRAs The IRS stipulates that an IRA owner must begin taking required minimum distributions (RMDs) by April 1st of the year following the calendar year during which he or she reaches age 70½, commonly referred to as the “required beginning date.” IRA beneficiary rules involve two separate issues: 1) the age of the IRA owner at the time of death, and 2) the identity of the IRA beneficiary. If an IRA owner dies before RMDs have begun, a spousal beneficiary can choose to withdraw all IRA assets within five years, to maintain the IRA under the deceased spouse’s name, or to treat the IRA as his or her own. Suppose Jim Bradshaw (a hypothetical case) dies and his wife, Linda, is the beneficiary of his IRA. If Linda maintains the IRA in Jim’s name, minimum distributions do not have to begin until December 31st of the later of 1) the year following the year of Jim’s death, or 2) the year in which Jim would have reached age 70½. However, distributions would be based on Linda’s life expectancy. If Linda chooses to treat the IRA as her own, she is entitled to name new beneficiaries, and the rules governing RMDs would be the same as if the IRA were originally her own. Therefore, distributions would have to begin by April 1st of the year after the year in which she turns 70½, and the required amount would be based on her life expectancy. If Jim were to die after RMDs had begun, the options for Linda would be different. She could choose to continue receiving distributions based on either Jim’s life expectancy or her own. As another option, Linda could opt to roll over Jim’s assets into her own IRA. (This option is not available for IRAs that have been annuitized.) Non-spousal beneficiaries may not treat IRAs as their own and cannot name additional beneficiaries. If the owner dies before the required beginning date, all assets in the account must be distributed by the end of the fifth anniversary year of the owner’s death. Alternately, the beneficiary may elect to receive distributions over his or her life expectancy. The amount of distributions is based on the beneficiary’s life expectancy, and distributions must begin by December 31st of the calendar year immediately following the calendar year of the owner’s death. If the owner dies on or after the required beginning date, the assets must be distributed over a period not exceeding the larger of the owner’s or the beneficiary’s life expectancy.