IRA Beneficiary Distribution Options

Not taking required beneficiary distributions results in extra tax penalties.

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Individual retirement arrangements pass to the beneficiary when the account holder dies. Special rules apply when the beneficiary must take distributions from the account. If you don't carefully follow the distribution rules for inherited IRAs, the Internal Revenue Service could end up benefiting from the IRA more than you will.


If you are the beneficiary of your spouse's IRA, you have a special distribution option not available to other non-spouse beneficiaries: You can elect to treat the IRA as your own, and you don't have to take any required distributions as a beneficiary. Instead, you take the distributions when they are required based on your own age, not the decedent's age, and you can begin taking distributions the year you turn 70 1/2 years old.

Five-Year Rule

If you do not, or cannot, treat the IRA as your own, the default rule for taking beneficiary distributions is that you must empty the IRA by the close of the fifth calendar year following the date of death. For example, if the decedent passed in 2015, you have to empty the IRA by the end of 2020. Under this method, you don't have to take money out each year. If you wanted, you could take a full one-time distribution in December 2020; as long as you empty the account by that point, you won't owe any penalties.

Annual Distributions

You can also opt to take annual distributions rather than use the five-year rule. Annual distributions allow you to take the required minimum distribution from the account each year, with the amount of each RMD dependent upon the size of the IRA and either your life expectancy or the life expectancy of the decedent. If the decedent died after starting his RMDs, you use the longer of your life expectancy or the life expectancy of the decedent in the year he died. If the decedent died before having starting his RMDs, use your life expectancy. Life expectancies are figured based on age using Table I in IRS Publication 590.


Steep penalties apply if you don't take the required distributions from your inherited IRA -- 50 percent of the amount you should have taken out but didn't. For example, if you should have taken out $15,000 but only took out $8,000, you owe a $3,500 penalty when you file your taxes, i.e., 50 percent of the $7,000 you didn't take out. These penalties apply even if you inherited a Roth IRA and wouldn't have had to pay taxes on the distribution at all.