Required Minimum Distributions for Beneficiaries - Complicated or Easy?

An advisor called recently with this scenario. A 20-something beneficiary, let’s call her Corey, had just inherited several retirement accounts from her 50-something father. Corey was the named beneficiary on each account. Would you have known how to handle each one of them?

Dad’s IRA - This is the one most people would be familiar with. In order to use a “stretch” IRA, the account should be retitled along the lines of “Dad, deceased, IRA fbo (for benefit of) Corey." Different companies will use different wording, the key is that the title clearly indicate that the account is an inherited account. Corey will look up the age she is on her birthday next year on the IRS Single Life Table. The factor there will be the one she uses to calculate her required distribution next year. In each year after that, she will subtract one from her factor until the inherited IRA account balance goes to zero.

Dad’s Roth IRA - The inherited Roth IRA will follow the same procedures as the inherited IRA - including the required minimum distributions. Although the Roth IRA owner has no required minimums, a Roth beneficiary does have required minimum distributions. The distributions from the inherited Roth IRA are generally income-tax-free to the beneficiary.

Dad’s Inherited IRA - Dad had inherited an IRA from his father. He was taking his annual distributions as a beneficiary. Dad named Corey as the “successor” beneficiary of this inherited IRA. All beneficiaries of inherited IRAs should name successor beneficiaries. If the beneficiary dies while there are still funds in the inherited account, the successor beneficiary continues to receive distributions, based on the original beneficiary’s life expectancy, until the account is emptied. This keeps the IRA out of the beneficiary’s estate.

Corey should have the account retitled. The dilemma is how to do that. Should it say "Grandfather, deceased, IRA fbo Corey or should it say "Dad, deceased, IRA fbo Corey"? In either case, it could appear that the required distributions would then be based on Corey’s life expectancy. If the IRA custodian will allow, try to include the words successor beneficiary in the account title. Corey cannot reset the life expectancy factor to her own. She must continue using the factor that Dad started with and continue reducing that factor by one each year. She “succeeds” to Dad’s benefit and continues his distributions.

Other Scenarios - This covers all the accounts that Corey inherited. But it does not cover all the different ways to handle an inherited retirement account. There are different rules for inherited employer plans such as a 401(k). There is another set of rules for retirement accounts that are inherited by an estate. And, those rules are different if the account owner dies before he gets to the date where he must begin taking distributions or if he dies after that date. There is another set of rules when a trust is the beneficiary of retirement assets.

One rule that is the same for all inherited retirement accounts - the beneficiary does NOT have the option of doing a 60-day rollover. Any time Corey wants to move her inherited retirement funds, she must do so in a direct transfer. A check payable to Corey will be taxable. For more information on the distribution rules for beneficiaries, see IRS Publication 590 available on the IRS website at www.irs.gov.

The above rules are what the tax code allows. The plan agreement for the IRA or employer plan may limit some of the above options. If you are looking to accomplish a specific goal, you need to be sure that your IRA or plan will allow your beneficiaries to take the necessary actions to accomplish that goal.

I think we can all agree that the distribution rules for beneficiaries can be confusing. Our first rule for our clients is “Touch Nothing.” Talk to us first; then do the transactions necessary to accomplish the intended goal. Mistakes are costly and the beneficiary oftentimes loses the ability to stretch the inherited IRA.

- By Beverly DeVeny and Jared Trexler

Posted in: beverly deveny,Ed Slott,ed slott ira,ed slott retirement,financial,financial advisor,inherited IRA,IRA beneficiaries,required minimum distributions