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inherited IRA

The “Default” Default Distribution Period

What is the default distribution period of an inherited IRA? Did you know that it depends on how old the original owner was at death?

Disclaiming an Inherited IRA

Disclaiming an inherited IRA must be done with caution. There may be many reasons to do this, and there are many ways to mess it up.

How to Deal With Missed Required Minimum Distributions

What happens when a beneficiary doesn’t act in a timely fashion with regard to taking Required Minimum Distributions from the inherited IRA?  In other words, what are your options if you’ve missed Required Minimum Distributions (RMDs) in prior years? The Inheritance So, let’s say you inherited an IRA from your mother – this was her own IRA that she had contributed to or rolled over funds from a qualified plan at some point, and had designated you as the sole primary beneficiary.  Things get really hectic and confusing after the death of a parent, and sometimes we don’t cover all of the bases properly… and in this example, you didn’t realize that you needed to begin taking Required Minimum Distributions (RMD) from your inherited IRA as of December 31 of the year following the year of your mother’s death.  As of now, for example’s sake, let’s say we’re in the […]

Stretching an IRA When There Are Non-Individual Beneficiaries

As we’ve discussed here previously, one of the requirements to enable an inherited IRA to be “stretched” over the lives of the beneficiaries is that all of the beneficiaries must be individuals.  That is to say, none of the beneficiaries can be something other than a person, such as a trust (specifically a trust that is not a see-through trust), a charity, or an estate.  If even one beneficiary is not a person, then all of the beneficiaries must take distribution within five years. But there’s a way around this, and it has to do with the timing of distributions. When an IRA owner dies, there is a key date to know: September 30 of the year following the year of death of the owner.  On that date, the beneficiaries are “set” for the IRA, and if available, the Designated Beneficiary is named.  It is on this date that the […]

Exceptions to the 10% Early Withdrawal Penalty from IRAs and 401(k)s

When you take money out of your IRA or 401(k) plan (or other qualified retirement plan, such as a 403(b) plan), if you’re under age 59½ in most cases your withdrawal will be subject to a penalty of 10%, in addition to any taxes owed on the distribution.  There are many exceptions to this rule though, and the exceptions are not the same for all types of plans.  IRAs have one set of rules, and 401(k)s have another set of rules. The exceptions are always related to the purpose for which the money was withdrawn.  The exact same dollars withdrawn do not have to be used for the excepted purpose, just that the excepted expense was incurred. IRA Exceptions It is important to know that all distributions from your traditional IRA are subject to ordinary income tax, but some distributions are not subject to the early withdrawal penalty.  The list […]

Fixing an IRA With the “Wrong” Beneficiary

Quite often, for many different reasons (often known only to the deceased original owner), the original owner of an IRA designates a beneficiary that the survivors don’t necessarily agree with. It might be that only one of several children is designated, or perhaps additional beneficiaries are designated along with a spouse.  In cases like these, there are ways to make changes to the outcome of the inheritance.  In this article we specifically deal with the case where only one of four children was designated as the primary beneficiary of the IRA. To resolve the situation, let’s consider the following IRA: John, the decedent, designated April (his daughter) as the primary beneficiary of his IRA.  It isn’t known why John only designated April as the beneficiary, as he has three other children – Bill, Chuck, and Dale – and John had only his IRA as an asset to pass along to […]

How an IRA is Treated When a Beneficiary Dies

When an IRA owner dies while the IRA still has funds in it, the primary beneficiary(ies) have the opportunity to transfer the account to an inherited IRA and begin taking the Required Minimum Distributions (RMDs) over his or her lifetime. When this primary beneficiary dies, it can be difficult to figure out who the money goes to. This is known as the successor beneficiary. It’s important to know the difference between a successor beneficiary and a contingent beneficiary. A contingent beneficiary takes the place of the primary beneficiary in the event that the primary beneficiary dies before the original owner does. A successor, on the other hand, takes the place of the primary beneficiary when the primary beneficiary outlives the original owner. So it’s a matter of timing. What we’re interested in is the successor beneficiary. There are four main ways that a successor beneficiary is determined: Successor is named […]

Special Treatment for an Older Spouse/Beneficiary of an IRA

Note: the situation described in this post was originally brought to my attention by Mr. Barry Picker, of Picker, Weinberg, & Auerback, CPAs, P.C.  Mr. Picker is another of those “rock stars” in the world of retirement plan knowledge, up there with the best of them.  Many thanks to Mr. Picker for sharing his wealth of knowledge. There is a special set of circumstances regarding inherited IRAs that only fits a few cases – but for those cases the rules can work out favorably and it is important to understand how this operates.  The circumstances are that a younger spouse has died and left an IRA to the older, surviving spouse.  In this case, if the decedent-spouse had already begun receiving Required Minimum Distributions (RMDs) from the IRA, the survivor-spouse, if sole beneficiary of the IRA, can make the distribution rules work in his or her favor. In any case, […]

Inherited IRA Multiple Beneficiary Example

I thought it might be helpful to work through an example of an IRA that has been inherited by multiple beneficiaries, so that we can discuss the important components of working with such a situation. In our example, we’ll say there is an IRA worth $800,000 at the date of death of the original owner, and she has designated four beneficiaries of the account.  One of the first factors that is important to note is that the beneficiaries could be anyone – they do not have to be related to the original owner, or likewise they could be the children, grandchildren, nieces, nephews, brothers or sisters of the original owner.  For the purpose of this example though, none of the beneficiaries is the surviving spouse of the original owner – surviving spouses have different rules to work from. Option 1 – Do Nothing The beneficiaries of the original account could […]

What Options Are Available for a Surviving Spouse Who Inherits an IRA?

First Spouse Program bronze medal (Photo credit: Wikipedia) When the owner of an IRA dies and leaves the IRA to his or her spouse as the sole beneficiary, there are some unique options available for handling this inherited IRA.  Keep in mind that these options are only available to a spouse a beneficiary – a non-spouse beneficiary has much more limited options available. Options for a Spousal Beneficiary of an IRA The first and easiest option is for the spouse to leave the IRA exactly where it is and do nothing.  In this manner, the IRA will continue to exist as belonging to the deceased spouse – for a time.  If the deceased spouse was over age 70½ years of age and subject to Required Minimum Distributions (RMDs), the surviving spouse could elect to continue receiving those RMDs using his or her late spouse’s lifetime as the distribution factor. On […]

Converting an Inherited 401(k) to Roth

Image via Wikipedia One of the provisions that is available to the individual who inherits a 401(k) or other Qualified Retirement Plan (QRP) is the ability to convert the fund to a Roth IRA. This gives the beneficiary of the original QRP the option of having all of the tax paid up front on the account, and then all growth in the account in the future is tax free, as with all Roth IRA accounts. What’s a bit different about this kind of conversion is that, since it came from an inherited account, the beneficiary must take distribution of the account over his or her lifetime, according to the single life table.  This means that, in order for this maneuver to be beneficial, the heir should be relatively young, such that there will be time for a lengthy growth period for the account – making the tax-free nature of the […]

Calculating RMDs for Various IRA Beneficiaries

There are a few different ways that Required Minimum Distributions are calculated for beneficiaries of IRAs.  The two primary determining factors are: Is the beneficiary the spouse of the original owner? and Did the original owner attain age 70½ prior to death? There are two more factors that also have an impact on the nature of the calculations, although the impact is different: Is there more than one beneficiary? and Is the beneficiary a person or an entity, such as a trust, a charity or the estate of the original owner? Image via Wikipedia Spouse If the beneficiary is the spouse of the original owner of the account, and the original owner died before age 70½, then the rule is that no RMDs are required until the owner would have reached age 70½.  At that time the beneficiary will use the Single Life table to calculate the distribution amount based […]

Spouse May Be Your Best Option for IRA Beneficiary

Image via Wikipedia Since a surviving spouse gets the most tax breaks of all possible beneficiaries (other than a charity, perhaps), it seems that choosing your spouse as the beneficiary of your IRA may be the best way to go. This is partly due to the availability of delaying taking distributions.  Any other beneficiary must begin taking Required Minimum Distributions (RMDs) by the end of the year following the year of the original IRA owner’s death.  The spouse beneficiary may defer distributions to the year in which the deceased would have reached age 70½, without taking any action. In addition, any other beneficiary besides the spouse is required to take the RMDs over his or her fixed-term single-life expectancy, while the spousal beneficiary can choose to take the RMDs over his or her single-life expectancy recalculated annually, so that the distributions will actually stretch out over his or her entire […]

How a Spouse Can Stretch an Inherited IRA

Image by Scott Ableman via Flickr If you or someone you know has inherited an IRA from a spouse, you have several options available to you.  You can leave the IRA where it is and treat the IRA as if the original owner is still alive; you could transfer the IRA to an inherited IRA, properly titled, and begin taking RMDs based upon your own age; or you can transfer the IRA to an IRA titled in your own name and treat the IRA as your own.  Each option has merit, you just need to determine which is best for you. Leave it where it is If you do nothing and leave the IRA in your late spouse’s name, you can delay having to take Required Minimum Distributions (RMDs) until your late spouse would have been 70½ years of age.  If you’re older than your late spouse, this could result […]

Required Minimum Distributions and the Successor Beneficiary

If the beneficiary of an inherited IRA dies before exhausting the inherited IRA or qualified retirement plan (QRP) through distributions, how are the ongoing distributions to be handled? It’s actually rather simple:  the successor beneficiary (determined by the plan or IRA beneficiary designation forms) steps into the shoes of the original beneficiary and continues receiving RMDs on the same schedule as the original beneficiary, based upon the original beneficiary’s attained age. Image by Kaptain Kobold via Flickr When the account is inherited by the original beneficiary, he or she must begin taking RMDs based upon his or her own age at that point in time (if enacting the “stretch” provision).  The rate at which the beneficiary must take RMDs is based upon the Single Life Table, also known as Table I.  Use the beneficiary’s age when RMD’s must begin to determine the factor to use to calculate the RMD from […]

Which Retirement Account Should You Tap First?

If you have multiple options of various different kinds of accounts to choose from, such as an IRA, a Roth IRA, a qualified retirement plan (such as a 401(k) plan), also known as a QRP, and perhaps an inherited IRA; you may be asking yourself, which one should I take a withdrawal from first? If you’re under age 59½, some of the options include considerable penalties – withdrawals from either the traditional IRA or the QRP will incur a 10% penalty for early withdrawal unless you meet one of the exceptions.  So this leaves the Roth IRA or the inherited IRA.  Each of these can be taxable to some degree, although partly non-taxable, depending upon the circumstances. If the inherited IRA was subject to estate tax upon the passing of the original owner, you may be able to take a portion of your withdrawal in credit against the estate tax, […]

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