IRA Death Benefit Distribution Requirements

Individual retirement accounts offer generous tax breaks when saving for retirement. If you happen to inherit one at the death of the original owner, some of the tax benefits disappear or come with a very early expiration date, making an IRA appear to be one of the more complicated accounts to transfer at death. In most cases, you have several choices for how to take the distributions.

Inherited From Spouse

If your spouse leaves you a Roth or traditional IRA, you have the most flexibility in how to take the distributions. You can transfer the account into your name and not have to make any withdrawals until you choose, or until you turn 70 1/2. You can roll a traditional IRA into an employer-sponsored plan such as a 401(k), 401(b) or 457 if you are eligible. Inherited Roth IRAs can be rolled over into a spouse's own Roth account. The third option is to take the required non-spouse beneficiary mandatory distributions.

Non-Spouse Beneficiary (Traditional)

You have two choices. Either take full distribution of the assets in the account by the fifth anniversary of the original owner's death, or begin taking the mandatory distributions in the year following death. If the owner died before the start of mandatory distribution at age 70 1/2, you must begin distributions in the year after the owner's death, with an amount based on your life expectancy. If the owner died after the start of mandatory distributions, the annual payout is based on your life expectancy or the original owner's, whichever is longer. Internal Revenue Service tables or your financial institution can help you calculate the minimum required distribution.

Non-Spouse Beneficiary (Roth)

Although Roth IRAs don't require mandatory distributions for the original owner, they do if inherited. Spouses who do not transfer the account into their own names are subject to the same rules as non-spouse beneficiaries: either take the full distribution by the fifth anniversary of death, or begin the mandatory distribution, similar to that normally reserved for traditional IRAs. The beneficiary's life expectancy determines the minimum distribution amount.

Taxable Roth Distributions

Roth IRAs have an additional consideration. Roth IRA distributions are not taxable income to beneficiaries unless the owner dies before five-year waiting period after opening the account. In that case, the Roth distributions are reported as taxable income to the beneficiary. If you fail to take the required distributions, you face a 50 percent excise tax on the undistributed amount.

Other Taxation Issues

Traditional IRA distributions are generally taxable to the original owner unless non-deductible contributions were made during the owner's lifetime. If you are not the decedent's spouse, you cannot transfer the IRA into your name and will pay tax at your tax bracket on every dollar you withdraw. Given the mandatory distribution rules, the IRA you may put you into a higher bracket. For most assets, cost basis resets at death to the current value of the inheritance, but not so with inherited IRAs. Beneficiaries pay tax on the full value of the distributions.

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