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If you’ve recently inherited retirement plan assets, you may be confused about your options. Can you distribute the funds? What about rolling them over to your own individual retirement account (IRA)? In fact, the situation is complicated, because the distribution options available to a retirement plan beneficiary are determined by several factors.
These include whether the retirement account owner (referred to hereafter as “participant”) dies before the required beginning date (RBD), whether the beneficiary is the spouse of the deceased, and the age of the beneficiary in relation to the age of the deceased at the time of death. Read on for an in-depth look at how inherited retirement plan assets are distributed.
If the participant dies before the plan’s RBD—the date at which they would have been mandated to start taking distributions from the account—the options available to the beneficiary depend on who the beneficiary is and whether they are the sole beneficiary or one of several beneficiaries.
A spouse who is the sole primary beneficiary of the retirement account can choose to distribute a large sum or even the balance of the IRA, or can just take the required minimum distribution over their life expectancy. If the spouse elects to distribute the assets over their life expectancy, said spouse is required to begin receiving post-death distributions either the year following the year the participant dies or the year the participant would have reached age 73 or 75, whichever year was later.
Previously, the Required Minimum Distribution (RMD) age for IRA distributions was 70½, but following the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019, the RMD age was boosted to 72.
This was further increased with the passing of the SECURE 2.0 Act in December 2022. The update stipulated that RMDs begin at 73 if you were born between 1951 and 1959 or 75 if you were born in 1960 or after.
For the purposes of calculating post-death required minimum distributions (RMDs), the spouse’s life expectancy is determined by using the Single Life Expectancy Table found in Appendix B of IRS Publication 590-B (a copy of which can be downloaded from the IRS website). This table must be referred to for each year the spouse needs to calculate the post-death RMD.
For instance, if the spouse is required to begin distributions in 2023, they will consult the table to determine the life expectancy period for 2023. In 2024, they must use the table to determine the life expectancy for 2024.
The spouse can also roll it over into an existing IRA.
Previously, a non-spouse human beneficiary could distribute the assets over the life expectancy of the oldest beneficiary. But following the passage of the SECURE Act, all assets must be distributed within 10 years for non-spouse beneficiaries.
Spouses are an exception to the 10-year rule, as are people with disabilities, and minor children; however, minor children are subject to the 10-year rule once they reach majority age.
An individual may choose to designate a nonperson, such as the individual’s estate or a charity, as the beneficiary of the retirement account. In this case, the nonperson beneficiary must distribute the full balance by December 31 of the fifth year following the year the participant dies.
Whether the person bequeathing the retirement account died before or after the required beginning date for distributions affects the options available to beneficiaries.
If the participant dies after the RBD, these are the options available to the different types of beneficiaries.
The spouse beneficiary is required to distribute the assets over either the life expectancy of the spouse or the remaining life expectancy of the deceased, whichever is longer. If the funds are distributed over the life expectancy of the spouse, their life expectancy is recalculated each year. If the funds are distributed over the remaining life expectancy of the deceased, the life expectancy number is fixed in the year of death and then reduced by one in each subsequent year.
For example, let’s assume that a participant died at age 80, and the spouse beneficiary is 75 years old the following year. According to the Single Life Expectancy Table, the participant’s life expectancy would be 11.2, and the beneficiary’s life expectancy would be 14.8. The spouse beneficiary would use 14.8, which is the longer of the two life expectancies.
If the ages were reversed, and the longer of the two life expectancies was that of the deceased, the spouse would subtract one each subsequent year to determine the applicable life expectancy.
A non-spouse beneficiary or multiple beneficiaries would be required to distribute the assets over the 10-year period following the original IRA holder's death. Before the passage of the SECURE Act, the distributions could be spread out over the lifetime of the non-spouse person.
If the beneficiary is a nonperson, the assets must be distributed over the next 10 years.
RMD rules do not apply to the owner of a Roth IRA, so there is no RBD for a Roth IRA; however, the post-death RMD rules (beneficiary options) do apply to those inheriting a Roth IRA. The options for Roth IRA beneficiaries are the same as those that apply to traditional IRA beneficiaries if the owner dies before the RBD.
It is important to note that retirement plans are not required to allow the options provided in the RMD regulations. For instance, as discussed above, RMD regulations provide that a non-spouse beneficiary of a participant who dies before the RBD may distribute the assets over the beneficiary’s life expectancy or within five years after the participant dies.
Despite these provisions, an IRA agreement or qualified plan may require the beneficiary to distribute the assets in a much shorter period—for instance, immediately after the participant dies. If you inherit retirement assets, be sure to check with your plan provider about your available options.
Yes, beneficiaries pay taxes on inherited traditional IRAs. For Roth IRAs, no tax needs to be paid as the account was funded with pre-tax dollars.
If you are a spouse and you've inherited an IRA, the best thing you can do is to transfer the account into your name/account. You can name yourself as the owner of the account or you can transfer the account into another IRA account or a qualified retirement plan.
The 10-year rule regarding an IRA stipulates that beneficiaries must have fully depleted the IRA account they inherited within 10 years. This does not apply to some eligible designated beneficiaries.
If you inherit a retirement plan, it's critical to familiarize yourself with the distribution rules in order to avoid any penalties. Such matters can often be complicated due to the variety of scenarios. If you are confused, it's best to consult a financial advisor or tax professional that can help guide you through your particular situation.