IRA Beneficiary Rules
IRA accounts provide significant tax savings in addition to helping people save more money for retirement. These tax advantages do not necessarily have to end upon the death of the account owner. Structured properly, a beneficiary IRA can save money on taxes.
One method to accomplish this involves setting up a stretch IRA which can provide a huge tax savings on large estates and provide ongoing income for subsequent generations.
Of course, in order to make any of these things work, you have to understand the IRS rules and regulations regarding IRA accounts and beneficiary IRAs. The majority of these rules can be found in Publication 590 on the IRS website.
Beneficiary IRA RMD Distribution Rules
The IRS rules for beneficiary IRAs are complicated depending upon if you are a spousal beneficiary or a non-spousal beneficiary, as well as whether or not RMDs had already begun. However, they can be simplified for many situations.
(These rules are all for "individuals." Non-individuals have special rules which apply to them. Refer to IRS publications for these rules.)
IRA Spousal Beneficiary
Inheriting an IRA from a spouse gives the spousal beneficiary three options:
- Treat the IRA account like it was your own account.
- Rollover the IRA into your own qualified account.
- Keep the IRA as a beneficiary IRA.
Non-Spousal IRA Beneficiary
A non-spouse beneficiary of an IRA account has far fewer options. A non-spousal beneficiary may not treat the account as their own IRA, nor can they rollover the IRA into another qualified account. (However, they can transfer the account via a trustee-to-trustee transfer, but it must remain as a beneficiary IRA.)
For non-spousal beneficiaries (or for spouses who elect to be treated as beneficiaries), RMD rules depend upon whether or not the original account owner had reached the Required Beginning Date for RMDs.
If the IRA account owner had already started taking Required Minimum Distributions, or RMDs, prior to their death, then the beneficiary of the IRA has to withdraw the balance of the account over a five-year period.
If the IRA owner had not reached attained age 70 1/2, then the beneficiary may calculate RMD withdrawals over their own life span.
2009 RMD Waiver for Beneficiary IRAs
Like other IRA account holders, beneficiaries can elect to waive their 2009 Required Minimum Distribution if they so choose. For those withdrawing the IRA over five years, this essentially changes the total withdrawal period to six years.