Articles
Non Spouse Beneficiary
Wealth Management Ann Arbor
Facts to know when you inherit a non-spousal IRAThere are many planning and distribution considerations for individuals inheriting a non-spouse’s IRA (Traditional, Roth, SEP, or SIMPLE). It is imperative that you have a clear understanding of your options so you can take advantage of the many ways to stretch out the life of these IRA assets. Continuation of tax-deferred compounding can help build wealth for you and your family. The goal at our firm is to assist you in understanding the minimum distribution rules, establishing separate accounts or executing a plan-to-plan transfer, and naming your successor beneficiary.The first step is to understand the options available to you for your inheritance:
Structured Settlement Ann Arbor
IRA owner dies BEFORE the required beginning date1. Non Spouse Beneficiary
Inherited IRA – Take Required Minimum Distribution (RMD) by December 31 of each
year beginning with the year following the IRA owner’s year of death using Single Life
Table (term certain) based on beneficiary’s age. That life expectancy will then be reduced by one in each subsequent year.
Five-Year Rule – Deplete the IRA during a five-year period that begins on December 31
following the year of the death of the IRA owner. The entire account must be distributed
by the end of the fifth year.
Lump-Sum Distribution
Use Disclaimer – Disclaim (refuse) all or a portion of IRA assets within nine (9) months after the IRA owner’s death.
2. Multiple Beneficiaries
Inherited IRA
- If account is divided by December 31 of the
year following the IRA owner’s year of death,
each beneficiary will take an RMD by
December 31 of each year beginning with
the year following the IRA owner’s year of
death using Single Life Table (term certain)
based on their individual age. That life
expectancy will then be reduced by one in
each subsequent year. - If account is NOT divided by December 31 of the year following the IRA owner’s year ofdeath, take RMD by December 31 of each year beginning with the year following the IRA owner’s year of eath using Single Life Table(term certain) based on the age of the oldest beneficiary. That life expectancy will then be reduced by one in each subsequent year.Five-Year Rule – Deplete the IRA during afive-year period that begins on December 31following the year of the death of the IRA owner. The entire account must be distributed by the end of the fifth year.
Use Disclaimer – Disclaim (refuse) all or a portion of IRA assets within nine (9) months after the IRA owner’s death.
3. Trust
Inherited IRA
If the trust is considered a “look through” trust,
take RMDs by December 31 of each year
beginning with the year following the IRA
owner’s year of death based on age of oldest
trust beneficiary using Single Life Table (term
certain). That life expectancy will then be
reduced by one in each subsequent year. Each
distribution is paid to the trust account.
Five-Year Rule – Deplete the IRA during a
five-year period that begins on December 31
following the year of the death of the IRA
owner. The entire account must be distributed
by the end of the fifth year.
Lump-Sum Distribution
Use Disclaimer – In some instances may be able to disclaim (refuse) IRA assets within nine (9) months after the IRA owner’s death.
4. Estate
Five-Year Rule – Deplete the IRA during a
five-year period that begins on December 31
following the year of the death of the IRA
owner. The entire account must be distributed
by the end of the fifth year.
Lump-Sum Distribution
Use Disclaimer – In some instances may be able to disclaim (refuse) IRA assets within nine (9) months after the IRA owner’s death.
5. Charity
Five-Year Rule – Deplete the IRA during a
five-year period that begins on December 31
following the year of the death of the IRA
owner. The entire account must be distributed
by the end of the fifth year.
Lump-Sum Distribution
IRA owner dies AFTER the required
beginning date
1. Non – Spouse Beneficiary
Inherited IRA – Take RMD by December 31
of each year beginning with the year following
the IRA owner’s year of death using Single
Life Table (term certain) based on beneficiary’s
age or; if the beneficiary is older than the
deceased IRA owner, distribution may be
based on the deceased IRA owner’s age. That
life expectancy will then be reduced by one in
each subsequent year.
Lump-Sum Distribution
Use Disclaimer – Disclaim (refuse) all or a portion of IRA assets within nine (9) months after the IRA owner’s death.
2. Multiple Beneficiaries
Inherited IRA
• If account is divided by December 31 of the
year following the IRA owner’s year of death,
each beneficiary will take an RMD by
December 31 of each year beginning with
the year following the IRA owner’s year of
death using Single Life Table (term certain)
based on their individual age. That life
expectancy will then be reduced by one in
each subsequent year.
• If account is NOT divided by December 31 of
the year following the IRA owner’s year of
death, take RMD by December 31 of each
year beginning with the year following the IRA
owner’s year of death using Single Life Table
(term certain) based on the age of the oldest
beneficiary. That life expectancy will then be
reduced by one in each subsequent year.
Lump-Sum Distribution
Use Disclaimer – Disclaim (refuse) all or a portion of IRA assets within nine (9) months after the IRA owner’s death.
3. Trust
Inherited IRA
If the trust is considered a “look through”
trust, take RMDs by December 31 of each
year beginning with the year following the
IRA owner’s year of death based on age of
oldest trust beneficiary using Single Life Table
(term certain). That life expectancy will then
be reduced by one in each subsequent year.
Each distribution is paid to the trust account.
Lump-Sum Distribution
Use Disclaimer – In some instances may be able to disclaim (refuse) IRA assets within nine (9) months after the IRA owner’s death.
4. Estate
Inherited IRA
RMDs based on age of IRA owner at death.
Use Single Life Table (term certain). That life
expectancy will then be reduced by one in
each subsequent year.
Lump-Sum Distribution
Use Disclaimer – In some instances may be able to disclaim (refuse) IRA assets within nine (9) months after the IRA owner’s death.
5. Charity
Inherited IRA
RMDs based on age of IRA owner at death.
Use Single Life Table (term certain). That life
expectancy will then be reduced by one in each
subsequent year.
Lump-Sum Distribution
Non-spouse beneficiaries do not have the ability to roll over the IRA they inherit to their own IRA. If you decide to keep the IRA you inherit, the IRA custodian must keep the IRA titled as an “Inherited” or “Beneficiary” IRA. The wording on the account may vary, but the important thing is that the account clearly shows that it is for the benefit of the beneficiary, but is NOT the beneficiary’s IRA. The name of the deceased participant should appear with indication that the beneficiary controls the account. If there are multiple beneficiaries and their shares are fractional, they may be best served by establishing separate accounts, so that each beneficiary can select his/her own investments and use his/her own age to compute RMDs.
The division of the deceased’s account into separate Inherited IRAs is considered a plan-to-plan transfer and is not a taxable event. Beneficiaries avoid the 10% penalty in Inherited IRAs no matter the age of the beneficiary. The 10% penalty is waived, as this is a “death distribution”. The beneficiary only owes ordinary income tax on the taxable amount of the distribution.
Any RMD that should have been taken by the deceased in the year of death must be distributed by the beneficiary(s) from their Inherited IRA(s) by December 31 of the year of death. The beneficiary(s) are only responsible for their portion of the RMD based on the portion of the IRA they inherited. A Roth IRA owner is always considered to have died before their required beginning date. Once you have established your Inherited IRA, you will want to designate your own “successor” beneficiary. The successor can step into your shoes and take distributions over the balance of your life expectancy if you die before distributing all of the assets in the IRA. Your successor beneficiary should be named as soon as possible, after you inherit the IRA, as part of a complete estate plan. A non-spouse beneficiary who inherits a qualified employer sponsored retirement plan (401(k), 403(b), governmental 457, etc.) must be permitted a direct trustee-to-trustee transfer of that plan balance to an Inherited IRA. You will need to contact your financial professional to establish an Inherited IRA. You will then need to contact the plan sponsor for help in executing the transfer of the assets into your Inherited IRA.
Non-spouse beneficiaries who inherit an employer sponsored retirement plan are eligible to make a directtrustee-to-trustee transfer to an Inherited Roth IRA. These conversions can be made through a directrollover of before-tax and/or after-tax money from the plan to the beneficiary’s Inherited Roth IRA. ARoth conversion of after-tax amounts will not be taxable income. Any pre-tax amount converted will beincluded in the Inherited Roth IRA holder’s gross income for the year. Remember you still have to takeRMDs each year from your Inherited Roth IRA. If you have an Inherited Traditional and Inherited RothIRA, RMDs must be taken from both accounts. NOTE: Only a direct transfer is allowed. This is anon-taxable distribution from the qualified plan that is sent directly to the new custodian and will bereported to the IRS as a rollover. Failure to employ the direct transfer process could make this transaction fully taxable to the beneficiary and end the tax-deferral available under the Inherited IRA.Beginning in 2010, the modified adjusted gross income (MAGI) and tax fi ling status requirement have been eliminated, and taxpayers are able to convert to a Roth IRA regardless of their MAGI or tax fi ling status. Additionally, for conversions in 2010 only, taxpayers may elect to pay all of their taxes in 2010 or 50 percent of the income resulting from the conversion will be included in the 2011 tax filing and 50 percent in the 2012 tax filing. Taxes will be paid at whatever Federal income tax rate is applicable for those tax years. All taxes on conversions after 2010 will be due in the year converted. Taxes due in regard to a Roth Conversion may be accelerated if a distribution is taken before 2012. Please consult your tax advisor for more information.
NOTE: Non-spouse beneficiaries who inherit Traditional IRAs cannot convert them to Inherited Roth IRAs.
This option could help benefit you and your family by allowing the features of a stretch IRA strategy previously unavailable to non-spouse beneficiaries of an employer sponsored retirement plan. By executing the direct rollover you will enjoy continued tax-deferred compounding. In addition, you only have to take RMDs, you can name the beneficiary to your Inherited IRA, and you will enjoy a broader investment selection for your Inherited IRA. Please also remember that the stretch IRA strategy is designed for investors who will not need the money in the account for their own retirement. There is no guarantee that there will be assets remaining in the account at the time of the IRA owner’s death. Please investigate all the options for handling your inheritance of qualified assets with your tax and legal advisors before executing a strategy.