A decedent IRA is an inherited IRA. In this case, the original owner of the IRA has passed away and the IRA money has been transferred to the beneficiary in the form of the decedent IRA. The withdrawal rules for an inherited IRA are different from the rules that apply to an original owner.
Transfer to Beneficiaries
An IRA lists the beneficiary or beneficiaries to inherit the account when the owner dies. If a spouse is the sole beneficiary, he can keep the IRA as his own or roll the proceeds into an IRA in his name. Non-spouse beneficiaries should transfer their portion of the IRA to a decedent or inherited IRA. The decedent IRA will be titled in the original owner's name, for the benefit of the beneficiary. With multiple beneficiaries, an inherited IRA would be set up for each beneficiary.
The new owner of an inherited IRA has two choices concerning the withdrawal of the money. Lump sum withdrawals can be made at any time so that the full account has been withdrawn by Dec. 31, five years after the original owner's death. The second option is to take an annual required minimum distribution -- RMD -- based on the beneficiary's life expectancy when she inherited the IRA. The IRS views the five-year withdrawal window as the default choice. Any withdrawals taken from a decedent IRA are considered taxable income to the beneficiary.
Stretch IRA Option
The choice to take annual minimum distribution payments from an IRA is often referred to as the "stretch IRA" option. The minimum distribution is calculated by dividing the IRA account balance by the beneficiary's life expectancy from the IRS Table 1 in the year of the first distribution. For example, a 50-year-old beneficiary has a life expectancy of 34.2 years, so she would withdraw 2.9 percent of the account. For the next year, the life expectancy number is reduced by one. In the example, the remaining IRA balance would be divided by 33.3. The first distribution must be withdrawn from a decedent IRA by Dec. 31 of the year following the year the original owner died.
Original Owner RMD
If the original IRA owner had reached the age of required minimum distributions -- age 70 1/2 -- a distribution must be made from a decedent IRA of any owner minimum requirement that would have been taken for the year of the owner's death. This distribution would be taxable to the beneficiary. For the next year, the minimum withdrawal would be based on the beneficiary's life expectancy.
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