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IRA Beneficiary Required Minimum Distributions

This is intended to be a brief overview of the issues complication Required Minimum Distributions for IRA Beneficiaries.

This is probably the area of IRAs that people know the least about, and have the most incorrect information about. Granted, it is a complicated issue. So much so, that you want to make sure to review this with your tax and legal counsel. This applies to both the IRA Owner as well as the IRA Beneficiary Election forms when being completed and certainly to the IRA Beneficiaries after the IRA Owner passes.

First, many people believe they can transfer the inherited IRA into their own IRA.  ONLY spouse beneficiaries can do this, and then, only SOME spouse beneficiaries can treat the inherited IRA as their own. This rule can even be affected by how the IRA Custodian/Trustee administers the IRA. So this should be reviewed with your IRA Custodian/Trustee.

Then others believe that all inherited IRAs are tax-free. Also false, although some Roth IRA distributions can be tax-free.

In addition, the beneficiary required minimums depend on a number of situations. Spouse beneficiaries have different options than non-spouse beneficiaries and the spouse beneficiary’s required minimum can be calculated differently. Trust, estates and charities can have still different options.

The date of death of the IRA Owner also has an affect on the beneficiary required minimums.  For instance, if the IRA Owner dies BEFORE his or her Required Beginning Date, there are different rules and options than if he or she dies ON or AFTER the required beginning date.

Required Beginning Date: April 1 of the year AFTER the IRA Owner attains age 70½.

Beneficiary required minimum distributions can start as early as the year of the death of the IRA Owner if the decedent has not yet taken his or her required minimum by the date of death. Another option can be waiting for five years to reduce the Inherited IRA to zero. The rules and procedures are not logical but they are the rules.

Trust beneficiary options differ depending on whether the trust is revocable or irrevocable, and who the beneficiaries of the trust are. The most common misconception with trust beneficiaries is that the inherited IRA can bypass the named trust and directly pay the beneficiaries of the trust. The IRS has never written a regulation to allow this.

So, this is just a brief overview of this important area of IRAs. But you should be able to understand how complicated it can be. Consequently, the most important thing you should take from this article is that you should always review all beneficiary issues before doing anything, whether as an IRA Owner or Beneficiary

Terry White

About Terry White

I started my business career after getting my degree in Accounting from the University of New Mexico in 1983. My first job was as a controller for a local title company, and in 1987 I started First Financial Escrow, Inc. Over the years I played a part in several startup companies including First Financial Equities, Inc., First Financial Trust, Inc., First Financial Marketing, Inc. and Asset Ventures, Inc. In 1997 First Financial Escrow, Inc. was able to purchase the escrow accounts from Sunwest Bank and changed its name to Sunwest Escrow. As the market changes, Sunwest has grown and changed along with it. Besides my wife, Sheila, we have three boys, two daughters-in-law, one grandson, another grandson on the way and a future daughter-in-law. Sunwest is my passion, and I enjoy coming to work every day to see what will happen next. I enjoy fly fishing, spending time in Colorado, biking and watching my boys play soccer.