The IRS has strict rules about distributing funds from an IRA when the IRA owner dies. If the IRA owner had required minimum distributions, then the beneficiary must take the full annual distribution or be subject to significant penalties. It helps to know the distinctions for beneficiaries when making estate plans or sorting through inheritance accounts. A brief summary:
Spouse as Beneficiary
- The surviving spouse may treat the inherited IRA as his/her own by designating his/her self as the account owner. As such, the new owner may be subject to required minimum distributions (RMDs). (This may only happen if the spouse is the sole beneficiary.)
- The IRA may be rolled over into the assets into another qualified account if there is no outstanding RMD. A rollover that contains an RMD creates an ‘excess contribution,’ which triggers a penalty.
- The surviving spouse may take a distribution, or roll over the distribution within 60 days, if the distribution isn’t part of a required annual distribution.
Non-spouse as Beneficiary
- The inherited IRA needs to be split into separate IRA accounts for each beneficiary.
- Non-spouse beneficiaries may not treat the IRA as his/her own, such as making contributions or rolling over funds into or out of the IRA.
- Trustee-to-trustee transfers are permitted if the IRA is in the name of the deceased IRA owner with the trustee as beneficiary.
- Each non-spouse beneficiary, such as the children of the deceased, must use his or her own life expectancy when determining the IRA distribution payout period for RMDs.
- Non-deductible contributions made by the deceased owner create an IRA with basis, and taxes will accrue upon distributions. (Tax liabilities are handled by a form submitted with income taxes, and may be subject to an estate tax deduction.)
If the IRA names a trust as beneficiary, the rules become even more complicated. It is best to seek professional financial advice from your Salmon Sims Thomas advisor to avoid creating tax consequences or penalties.