Personal Finance

Money Matters: What happens to beneficiary when owner of traditional IRA dies

Thanks to all of you who pointed out (and thanks to those who didn’t) the autocorrect error causing “stirpes” to become “stripes” throughout last week’s column.

At the risk of discussing a topic ad nauseam, this week’s column continues to address issues concerning IRA beneficiary designations.

This column will focus on what you can/should do if you are a named beneficiary of a traditional (not a Roth) IRA and the owner dies.

In general, actions taken will depend on the age of the deceased IRA owner, if you are a spouse or nonspouse, your age and your income needs.

Only a surviving spouse has the option of rolling an inherited IRA to their own IRA.

This can be a good option if there is no need for the money to meet expenses. Required Minimum Distributions can then be delayed until the surviving spouse reaches age 70 1/2.

Age differences

If surviving spouses are under age 59 1/2 and need to access the IRA assets, they should not roll the inherited IRA to their own. They should transfer the assets to an inherited IRA, which will allow them to access the assets without being subject to the normal early 10 percent penalty on withdrawals prior to age 59 1/2. If the deceased spousal IRA owner was older than 70 1/2, RMDs from the inherited IRA must begin by Dec. 31 of the year following his or her death. The RMD amounts will be based on the surviving spouse’s age and the IRS Single Life Expectancy table. If the deceased IRA owner was under age 70 1/2, the surviving spouse can delay RMDs from the inherited IRA until the year the deceased would have turned 70 1/2.

If an IRA owner dies after reaching age 70 1/2, theRMD must be taken for the year in which he or she died regardless of the type of beneficiary named (spouse, nonspouse, charity, estate or even if no designation is named). If this RMD is not taken by Dec. 31 of the calendar year in which the IRA owner died, there may be a 50 percent penalty of the amount not withdrawn.

Trustee transfer

Nonspouse IRA beneficiaries can utilize another option a surviving spouse has and transfer the assets to an inherited IRA. The account registration should include the name of the deceased IRA owner, as well as the name of the beneficiary/inheritor. Make sure you initiate a direct trustee-to-trustee transfer. You want the assets from the deceased owner’s IRA to transfer directly into your inherited IRA. There is no option for a 60-day rollover for inherited IRA assets.

If you receive a check and think you have 60 days to deposit the money into an inherited IRA, you will be very disappointed. If you receive a check, the money will be deemed a distribution and all of the money will be taxed as ordinary income. You have until Dec. 31 of the year following the original IRA owner's death to take your first RMD. That amount is calculated based on your age using the Single Life Expectancy table. You must take an RMD each year until the account is depleted or your death. Upon your death, the IRA will pass to your named beneficiaries and they must take RMD amounts in the year after your death calculated using your age based on the Single Life Expectancy table.

If the original IRA owner died before reaching age 70 1/2 spousal and nonspousal beneficiaries also have the option of taking distributions from an inherited IRA under the five-year rule. This rule allows distributions from an inherited IRA at any time, in any amount, as long as all of the assets are withdrawn by Dec. 31 of the fifth year after the original IRA owner’s death.

Spousal and nonspouse beneficiaries may also disclaim all or part of the IRA assets of which they are entitled. This decision must be made within nine months of the original IRA owner’s death and before assets are distributed.

A consultation with a knowledgeable financial planner, tax adviser or attorney may be useful when you find yourself listed as a beneficiary of a deceased IRA owner.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624

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