By: Wayne Buckwalter
People who are named as IRA beneficiaries are often unfamiliar with the IRS rules to apply to taxable distributions following the death of the account owner. The rules differ dramatically for spouse and non spouse beneficiaries. A spouse beneficiary may simply roll over the IRA tax free into an IRA owned by the surviving spouse and the normal distribution rules apply.
Generally, non spouse IRA beneficiaries are required to withdraw a minimum amount each year (Required Minimum Distributions – RMD’s), starting by Dec. 31 of the year after death of the IRA owner. Note: RMD rules apply to both traditional and Roth IRA’s.
RMD’s are calculated on the balance on Dec. 31 of the previous year and divided by the beneficiary’s life expectancy, as listed in the IRS’ “Single Life Expectancy” table. The RMD’s from a traditional IRA are taxable, those from a Roth are not. This calculation is done yearly based on the same formula.
IRA beneficiaries may extend RMD’s over their life expectancies. This is known as a “Stretch IRA” strategy to extend the tax deferral advantages of a traditional IRA and tax free growth of a Roth IRA. This is a wonderful investment opportunity.
Failure to properly name primary and contingent beneficiaries for each IRA account may prevent beneficiaries from taking advantage of this strategy. Properly created Trusts named as beneficiaries can automatically employ this strategy for younger beneficiaries including grandchildren. The younger the beneficiary, the greater the benefit may be gained from this strategy.
In the event there is no named beneficiary who is living, the IRA will generally default to the estate of the IRA owner. An estate cannot take advantage of this strategy.
The strategy may also be used for employer sponsored retirement plans, such as 401(k)s and 403(b)s. After the death of the owner, the non spouse beneficiary may roll over the account tax free into an IRA Deceased account and the same options apply.
For more information about IRA rules and how they may apply to you please contact Wayne Buckwalter, Chair of the Wealth Preservation Group at Cohen Seglias Pallas Greenhall & Furman PC at 215.564.1700 or firstname.lastname@example.org.