When an owner of an IRA dies, the monies in the IRA must be distributed to the owner's beneficiaries. Post-death distributions made to beneficiaries are subject to the general income tax treatment of all IRA distributions. Therefore, maximizing the deferral period that could be available for the distribution of an IRA can be an important tax savings tool.
The options available for deferring post-death distributions depend on the beneficiary's relationship to the deceased owner and whether the death occurred before or after the decedent had began their minimum required distributions (age 70 1/2). There is greater flexibility if the owner dies before reaching 70 1/2.
IRA beneficiaries are divided into two categories; a surviving spouse or all other beneficiaries (non-spousal).
A nonspousal beneficiary is either a "designated beneficiary" or a beneficiary of a decedent's will. A nonspousal beneficiary does not have the option of treating an IRA as their own. Therefore, the beneficiary may not make contributions into the account or roll the account into another IRA account. The title of the account must remain in the decedent's name throughout the entire distribution period.
If an IRA owner dies before reaching 70 1/2 the beneficiary that is not a "designated beneficiary" must withdraw the IRA over a five year period of time. If the beneficiary is a "designated beneficiary" they have the option to take distributions out over their own life expectancy.
A spouse has two options for an inherited IRA. The first is identical to the above rules for a nonspouse. The second is to treat the IRA as their own and redetermine the distribution period based on their own life expectancy which could potentially be significantly longer than the decedent's.
If an IRA owner dies after reaching 70 1/2 and has begun their required distributions, the IRA that is inherited is not afforded any flexibility regarding the starting date for the minimum distributions. The rules maximize the deferral period by allowing the longest life expectancy to be employed in the distribution period.
If the beneficiary is the spouse, the distributions must continue based on the longer of the surviving spouse's life expectancy or the deceased owner's life expectancy as of the year of death from the Single Life Expectancy Table. The five year rule of distribution is not available.
If there is no designated beneficiary, distributions continue using the deceased owner's life expectancy in the year of death using the Single Life Expectancy Table which is shorter than the Uniform Life Table. The five year rule of distribution is not available.
If there is a nonspouse designated beneficiary the required distributions continue over the longer of the fixed life expectancy of the designated beneficiary or the life expectancy of the deceased over a shorter Single Life Expectancy Table. The five year rule of distribution is not available.
Understanding the IRA distribution rules can be an important tax planning step. Not naming a beneficiary presents missed opportunities to defer distributions over longer life expectancies. Certain estate planning measures will be critical to extending the required distribution period. The most important is naming the beneficiary which is especially crucial when the owner dies before before the required distribution date. In addition to the above alternatives regarding the distribution period, there may be opportunities to delay the start date of a distribution cycle.
We recommend that you take the time to review your beneficiary options for your IRA accounts periodically to ensure that you and your beneficiaries will receive the most tax advantaged options for distributions.
No comments:
Post a Comment