Beneficiaries of Individual Retirement Arrangements who fail to follow the requirements for account distributions after the owner’s death eventually pay a substantial penalty to the Internal Revenue Service. The amount of distributions you are required to take as a beneficiary depends on several factors, including whether the account is a traditional or Roth IRA, as well as your desired timing of distributions. These rules apply to most beneficiaries, although surviving spouses have a special set of rules.
An IRA beneficiary normally must withdraw the entire account by the end of the fifth year after the account owner’s death. As long as the account balance is distributed before the expiration of five years, no minimum annual amount is imposed on beneficiaries. You can take as much or as little you want each year during this time.
Alternatively, IRA beneficiaries are allowed to take annual distributions based on the IRS life expectancy table, instead of withdrawing the entire account within five years. Annual distributions to IRA beneficiaries must begin in the year after the account owner’s death. If annual distributions don’t start on time, however, the beneficiary must liquidate the entire IRA within five years. Five large annual distributions could lead to a large tax bite, especially if they bump you into a higher tax bracket.
IRAs Inherited From Older Owners
When the owner of a traditional IRA dies before reaching age 70½, annual distributions to a beneficiary are stretched over the beneficiary’s life expectancy. This same situation applies to beneficiaries of Roth IRAs, regardless of the owner’s age at death. When a traditional IRA owner dies after age 70½, however, the beneficiary’s annual distributions are based on either the IRA owner’s life expectancy or the beneficiary’s life expectancy, whichever is longer. Younger beneficiaries in their 50s can therefore spread annual distributions over long periods using their own life expectancies.
A spouse who is the sole beneficiary of an IRA can take advantage of some special rules. Spouses don’t have to begin annual distributions until the year the IRA owner would have reached age 70½. This allows a spouse to defer annual withdrawals after the death of a young account owner. A beneficiary spouse may also choose to treat the decedent’s IRA as her own account. Young spouses can use this election to delay withdrawals until their own retirement age.