Sorting Through IRA Beneficiary Distribution Options
By Christle Johnson, QKA, CIP
IRA rules can be difficult for IRA owners to understand, and even more confusing to their beneficiaries. As an IRA trustee, custodian, or issuer, you can help lessen the confusion that surrounds beneficiary distribution options.
While the IRS regulations outline various available distribution options, the IRA plan agreement that governs the specific IRA may offer fewer options. Your organization should always check the governing IRA plan document for the specific payout options available under the IRA.
Distribution Options Depend on When the IRA Owner Died
Treasury Regulation 1.408-8 describes the IRA beneficiary distribution options for Traditional and savings incentive match plan for employees of small employers (SIMPLE) IRAs. Most IRA documents, including Ascensus’ IRA Simplifiers®, include all of the distribution options that are allowed under the regulations.
The distribution options that are available to beneficiaries depend on when the IRA owner died: either before—or on or after—the required beginning date (RBD). This date is April 1 of the year following the year the IRA owner attains age 70½, and it is also the date by which the IRA owner must take the first required minimum distribution (RMD). If the IRA owner died before the RBD, one set of options applies; if the death was on or after the RBD, a different set applies.
The Traditional and SIMPLE IRA beneficiary distribution options that apply before the RBD are the only options available for Roth IRA beneficiaries, regardless of when the Roth IRA owner died. (Since Roth IRA owners do not take RMDs, there is no “required beginning date” for Roth IRAs.)
Options When the IRA Owner Died Before the RBD
When a Traditional or SIMPLE IRA owner dies before his RBD (and when a Roth IRA owner dies at any age), the beneficiary distribution options generally may include
taking a lump-sum distribution,
taking payments under the five-year rule,
taking single life expectancy payments,
spouse beneficiary transferring assets to her own IRA, or
spouse beneficiary distributing and rolling over assets to her own IRA.
Five-Year Rule
The five-year rule requires that all of the IRA assets be distributed by December 31 of the fifth year after the IRA owner’s death. The beneficiary is not required to take a distribution each year, as long as the beneficiary depletes the entire balance by December 31 of the fifth year after the IRA owner’s death.
Life Expectancy Payments
Life expectancy payments are minimum distribution amounts that must be taken annually. The minimum amount is calculated by dividing the IRA’s prior year-end balance by a single life expectancy divisor from the Single Life Expectancy Table in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). The divisor is based on the beneficiary’s single life expectancy. Spouse beneficiaries will refer to this table every year to calculate their life expectancy payment (“recalculation”). Nonspouse beneficiaries refer to this table only for the first distribution year; for each following year, they must subtract one year from the life expectancy divisor used in the previous year (“nonrecalculation”). Note that a beneficiary can always withdraw more than the single life expectancy amount.
Spouse Beneficiary Transfer or Rollover
Only a spouse beneficiary is allowed to treat the inherited assets as her own through a transfer to the spouse’s own IRA—or by taking a distribution from the inherited IRA and rolling it over to the spouse’s own IRA within 60 days. When the spouse beneficiary treats the IRA as her own, she becomes the IRA owner and the distribution rules apply as they would to any other IRA owner (e.g., RMDs beginning at age 70½).
Nonperson Beneficiaries
If not taking a lump-sum distribution, a nonperson beneficiary (e.g., a trust, estate, or charity) must take payments under the five-year rule. But a “qualified trust” (generally an irrevocable trust) may have additional options. (These sometimes complicated options are beyond the scope of this article.)
Options When the IRA Owner Died On or After the RBD
If a Traditional or SIMPLE IRA owner died on or after his RBD, the beneficiary distribution options may include
taking a lump-sum distribution,
taking single life expectancy payments,
spouse beneficiary transferring assets to her own IRA, and
spouse beneficiary distributing and rolling over assets to her own IRA.
When the IRA owner’s death occurs on or after the RBD, life expectancy payments are based on the longer of
the designated beneficiary’s single life expectancy (determined in the year after the IRA owner’s death), or
the IRA owner’s single life expectancy (determined in the year of the IRA owner’s death, reduced by one).
Life expectancy payments must begin by December 31 of the year after the IRA owner’s death. Beneficiaries can always take more than the minimum life expectancy amount. If there are multiple beneficiaries named and separate accounting has not been established by December 31 of the year after death, only the oldest designated beneficiary’s life expectancy can be used to obtain the single life expectancy divisor. And this divisor will apply to all beneficiaries.
Life expectancy distributions to nonperson beneficiaries (e.g., a trust, estate, or charity) are based on the single life expectancy of the deceased IRA owner. As noted earlier, however, a qualified trust (generally an irrevocable trust) may have additional options.
First Things First
When sorting through IRA beneficiary distribution options, remember, first things first: verify the type of IRA and when the IRA owner died. Then refer to the IRA plan agreement to ascertain which beneficiary distribution options apply. After that, it’s a matter of whether the beneficiary is a spouse or nonspouse beneficiary. A spouse beneficiary may have additional options, whereas a nonspouse beneficiary’s options will be more limited.
Feel like you need more information or guidance on handling IRA beneficiary distributions? Consider listening to all or part of the Ascensus IRA Beneficiary Distributions webinar series.
