FAQs – Distribution Options for IRA Beneficiaries

Why must I take distributions from my inherited IRA?
IRAs are intended to provide for the retirement of the IRA holder and, after he or she is deceased, for the support of his or her beneficiaries. They are not intended to permanently shelter savings from income tax. For this reason, the IRS has established distribution rules to ensure that an IRA will be depleted over the course of the IRA holder's and, if applicable, beneficiary's life expectancies. The distributions that are taken to satisfy these rules are often referred to as required minimum distributions (RMDs).

What happens if I miss a required minimum distribution (RMD) from an inherited IRA?
Generally speaking, if an IRA beneficiary fails to take an RMD by the applicable deadline (generally December 31), the beneficiary is subject to a 50% penalty on the amount that should have been taken out, but was not. However, if a spouse beneficiary is the sole beneficiary of an inherited IRA and he or she misses an RMD, there is an added consequence. In such cases, the IRA ceases to be a beneficiary IRA and is deemed to be the surviving spouse's own IRA.

Following the death of an IRA holder, what factors are taken into consideration for determining the distribution alternatives available for the beneficiaries of the decedent's IRA?
While many factors can impact what distributions options are available to an IRA beneficiary following the death of an IRA holder, there are three primary factors that must be taken into consideration:

1. the age the IRA holder was at the time of his or her death
2. the beneficiary's relationship to the deceased IRA holder
3. whether the beneficiary in question was the sole beneficiary of the IRA

How does the IRA holder's age at death affect my distribution options as an IRA beneficiary?
Whether the IRA holder died before his or her required beginning date (April 1 following the year in which the IRA holder turned age 70½) has a major impact on what beneficiary options are available to you.

What are my distribution options as an IRA beneficiary if the IRA holder died before his or her required beginning date?
When an IRA holder dies before his or her required beginning date, two basic distribution options are generally available to you as an IRA beneficiary:

Five-Year Rule: Under this option, an IRA beneficiary can generally take distributions in any amount at any time. However, the beneficiary must totally deplete his or her portion of the IRA by no later than December 31 of the year containing the fifth anniversary of the IRA holder's death.

Life Expectancy Payments: Under this option, an IRA beneficiary must begin distributions based on his or her single life expectancy by no later than December 31 of the year following the year of the IRA holder's death. Spouse beneficiaries, however, may wait until December 31 of the year the deceased IRA holder would have turned age 70½ to begin distributions under this rule.

(Note: The distribution options available to an IRA beneficiary following the death of an IRA holder can be significantly impacted by additional factors including the terms of the underlying IRA investments, the terms of the IRA plan agreement, and the administrative policies of the IRA trustee or custodian.)

What are my distribution options as an IRA beneficiary if the IRA holder died on or after his or her required beginning date?
When an IRA holder dies on or after his or her required beginning date, required distributions for beneficiaries, beginning in the year following the year of the IRA holder's death, are generally determined according to the single life expectancy of the beneficiary. However, if the remaining life expectancy of the deceased holder is longer than the life expectancy of the beneficiary, the beneficiary may use the remaining life expectancy of the deceased IRA holder. For nonspouse beneficiaries (as well as spouse beneficiaries in cases where the spouse beneficiary is not the sole beneficiary) the life expectancy factor is determined according to a nonrecalculation method. On the other hand, in cases where a spouse beneficiary is the sole beneficiary, his or her life expectancy factor is determined according to a recalculation method.

When determining my required distributions as an IRA beneficiary, what does it mean to recalculate or not recalculate my life expectancy?
The federal regulations governing required IRA distributions provide two basic methods for determining life expectancy factors: recalculation and nonrecalculation. With the recalculation method, an IRA holder (or spouse beneficiary) looks up a life expectancy factor for calculating required minimum distributions each year in the IRS-provided single life expectancy table found in IRS Publication 590, Individual Retirement Arrangements (IRAs). Alternatively, with the nonrecalculation method, the life expectancy factor is looked up in the life expectancy table for the first distribution year in the same way as when a person uses the recalculation method. However, in subsequent years, rather than going back to the table each year, one year is subtracted from the original life expectancy factor for each year that has passed since the first beneficiary distribution year. The life expectancy of nonspouse beneficiaries must always be determined according to the nonrecalculation method.

What beneficiary distribution options are available when a deceased IRA holder's estate is named as the beneficiary of his or her IRA?
The distribution options available to an estate as an IRA beneficiary vary depending on whether or not the IRA holder died before his or her required beginning date. In cases where the IRA holder has died before his or her required beginning date, the IRA funds may be paid to the estate using the five-year rule (i.e., distribution may generally be made at any time in any amount provided the entire IRA is depleted by December 31 of the year containing the 5th anniversary of the IRA holder's death). If the IRA holder died on or after his or her required beginning date, the estate may generally take distributions over the remaining (nonrecalculated) life expectancy of the deceased IRA holder.

What beneficiary distribution options are available following the death of an IRA holder when a trust is named as the beneficiary of an IRA?
If the trust meets certain criteria outlined in IRS regulations, the individual beneficiaries of the trust may be eligible for the same distributions options they would otherwise be eligible for if they had been named as direct beneficiaries of the IRA. However, in cases where the trust does not meet all of the criteria outlined in IRS regulations, the trust will either be required to take distributions in accordance with the five-year rule (if the IRA holder died before his or her required beginning date), or over the nonrecalculated life expectancy of the deceased IRA holder (if the IRA holder died on or after his or her required beginning date). In order for the individual beneficiaries of the trust to be eligible for the same distribution options they would be eligible for if they had been directly named as beneficiaries of the IRA, the trust must meet the four following criteria:

1. the trust must be valid under state law
2. the trust must be irrevocable, or become irrevocable upon the death of the IRA holder
3. the beneficiaries of the trust must be identifiable
4. a copy of the trust instrument or qualifying documentation of the trust must generally be provided to the trustee, custodian or issuer by no later than October of the year following the year of the IRA holder's death

This information is not intended to be legal or tax advice. Please consult a tax, legal, or financial professional with questions.

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