2/04/2000

Inheriting an IRA

As the "graying" of America continues, it is becoming increasingly common for spouses, adult children, other relatives, etc. to inherit money, much of which is in IRA accounts. What are your options if you were to inherit an IRA? Well that actually depends on several factors, which I will try to clarify in this article.

The Initial Factors Affecting Your Options

The rules governing inherited IRA’s initially fall into one of two categories.

The first criteria that is a determining factor is: whether or not you, as the beneficiary, are the spouse of the deceased. Spouses who inherit IRA’s have one set of options, non-spouses another. (This article is divided into two sections, one for the spouse, the second for the non-spouse beneficiary. )

The second criteria that determines your options - spouse and non-spouse beneficiaries alike - is whether or not the deceased IRA owner had reached his or her required beginning date - RBD. What is the required beginning date? That is the date upon which an IRA owner must begin taking minimum distributions. The RBD is: April 1 of the year after the year the owner turns 70 1/2. Thus, if the IRA owner turns 70 on February 12, 2000, he/she turns 70 1/2 six months later, on August 12, 2000. Thus, the owner’s RBD would be on April 1 of the next year or in this case April 1, 2001. If the deceased owner had reached the RBD, one set of options apply, if not, another set of options apply.

Please note two issues when reading this article:

1. Some distribution options discussed may by limited or not available according to your IRA plan document -- the rules put forth by your IRA custodian.
2. This article does not contain all of the distribution rules once you have selected an certain option. Discussing these details would make for an article of seemingly endless length.

Rules for the Spouse as Beneficiary

Circumstance I - Your Spouse has left you an IRA and passed away before their RBD.

1) Elect the five year rule. Under the five year rule the beneficiary must receive the deceased owner’s entire IRA by December 31 of the calendar year which contains the fifth anniversary of the IRA owner’s death. So if the IRA owner passed away on Feb 12, 2000 and the five year option was elected, all funds must be withdrawn by Dec. 31, 2005.

2) Elect out of the five year rule. Leave the account in the deceased’s name and begin taking distributions as the designated beneficiary by the later of: 1) Dec. 31 of the calendar year immediately following the calendar year in which the IRA owner died or 2) Dec. 31 of the calendar year in which the IRA owner would have attained age 701/2. The distributions would continue over the single life expectancy of the beneficiary.

NOTE: Options 1 & 2 may be advantageous to the spousal beneficiary who is substantially younger than age 591/2, and wants to take immediate distributions without a 10% premature distribution penalty!

3) Rollover the IRA Account - Rollover the IRA into an IRA account in the surviving spouses name and take distributions under standard IRA rules. This must be done by Dec. 31 of the year following the IRA holder’s death.

4) Take all or a portion of the assets out of the IRA and rollover the remainder. Taxes would be due on the portion withdrawn from the IRA. If the spouse beneficiary is under age 591/2 and needs to take money out of the IRA penalty-free (not income-tax-free) the portion not rolled over would not be subject to the 10 percent premature distribution penalty.

Circumstance II -Your Spouse has left you an IRA and he/she died after their RBD

1) Continue to Receive Payments as Beneficiary - if the IRA holder’s required minimum distributions (RMD) were established under the nonrecalculation method then the joint life expectancy could continue to be used. Under the recalculation method, joint life expectancy would be used for the year of death, and then the spouse beneficiary’s single life expectancy after that.

2) Treat as Own - rollover or transfer into an account in the beneficiary’s name. The required minimum distribution amount in the year of death may not be rolled over.

Rules for the Non-Spouse Beneficiary

Circumstance I - The IRA owner passes away prior to his/her required beginning date.

1) Five Year Rule - The nonspouse beneficiary may take distributions from the IRA under the five year rule. The rule, as stated above is as follows: the beneficiary must receive the IRA owner’s entire balance by December 31 of the calendar year which contains the fifth anniversary of the IRA owner’s date of death. So if the date of death was Feb. 12, 2000, no money would need to be withdrawn until Dec 31, 2005. However, money could be received, if desired, prior to this date.

2) Exception to the Five Year Rule - Under this election, the beneficiary is required to be paid from the IRA over the life of the nonspouse designated beneficiary or over a period not exceeding beyond the life expectancy of the nonspouse beneficiary. The attained age used for life expectancy is the calendar year in which the distributions are required to begin. This is Dec. 31 of the year following the year in which the IRA owner died.

Circumstance II - The IRA owner has left you an IRA passing away after their RBD.

Receive distributions as the Beneficiary - If required minimum distributions were established under the recalculation method, in the year of the owner’s death, the joint life expectancy may continue to be used. For all subsequent years, minimum distributions will be based on the single life expectancy of the beneficiary and not recalculated each year. If the non-recalculation method was in effect, then joint life expectancy may continue to be used.

(SIDE NOTE: If the nonspouse beneficiary was more than 10 years younger than the IRA owner while minimum distributions were withdrawn during his or her lifetime, the calculation of those distributions were subject to the MDIB rule --- Minimum Distribution Incidental Benefit. This is essentially as special table for determining the joint life expectancy. Upon the IRA owner’s death the MDIB rule is no longer in effect for the calendar years after the year of owner’s death and future distributions are based on general IRA rules.)

I have tried the best I can to explain the rules, keep the explanation simple and not be too exhautisive, while adequately covering the subject. However, I acknowledge that if you are reading these rules for the first time, the above must be difficult to comprehend. It is a complex subject that requires much study.

Please send questions or comments to dcoffin46333@wradvisors.com.