If you’ve inherited a substantial amount from a friend or loved one’s Individual Retirement Arrangement, you have several options for distribution that you should be cognizant of.
First, if you’d like the money upfront, without consideration of tax, you may take a lump-sum distribution at any time. This distribution will be includable in your gross income. Beware, this could put you in a higher tax bracket than usual, and tax withholding on the amount may not be sufficient to pay the tax.
Second, you may be able to take smaller amounts over time know as Required Minimum Distributions, or RMDs. Exactly how RMDs are determined depends on several factors and these include:
- Whether the account owner died after 2019 (the SECURE Act made changes to RMDs for beneficiaries if the death of the account holder occurred after 2019).
- The relationship of the beneficiary to the account owner.
- Whether the account owner died before or after their required beginning date.
Spouses of the account holder, who are also the sole beneficiary, have more options than non-spouses. If the account holder died before their RMD requirement date, the spouse can keep the account as an inherited IRA and delay beginning distributions until their spouse would have turned 72. Or they may take distributions based on their own life expectancy. Or they may follow the 10-year rule and empty the account fully within 10 years of their spouse’s death. Finally, they can roll over the account into their own IRA. If their spouse’s death occurred after the required beginning date, the spouse can only keep it as an inherited account and take distributions based on their own life expectancy or roll over the account into their own IRA.
For non-spouse beneficiaries, the rules apply depending on whether that individual is a designated beneficiary or not. An eligible is designated beneficiary who is not the spouse is a person who is a minor child of the deceased person, or a chronically ill individual who is not more than 10 years younger than the IRA owner of the plan participant. An eligible designated beneficiary may take distributions over the longer of their own life expectancy or the account holder’s remaining life expectancy. Or, that person may follow the 10-year rule.
And finally, if a person is not an eligible designated beneficiary, they may only follow the 10-year rule.
As you can see, IRA beneficiary rules are complex. Call this office for a consultation and we will be happy to help you.