Inherited IRAs – The Choice May Be Yours But You Must Follow IRS Requirements

When your spouse dies there are so many things to deal with that an inherited IRA often takes a back seat. However, like everything else associated with estate administration, decisions will have to be made. As the spouse you must choose to take required minimum distributions (RMD) from your deceased spouses IRA in one of two ways, depending on whether your spouse dies before their own required beginning distribution (RBD) date from their IRA or after. The RBD is April 1^st of the year following the year the original IRA owner reaches 70 1/2. The two methods for calculating the RMD are the life expectancy method or the five year method. Once the choice of distribution method has been made it’s irrevocable.

Here are the two methods:

1. If your spouse dies before the required beginning date for their IRA distributions you have the luxury of selecting either the life expectancy method or the five year method.
2. The life expectancy method requires withdrawing minimum amounts annually per an IRS mortality table. It is typically based on the beneficiary’s life expectancy. You can’t take less per year than the RMD but you can always take more.
3. The five year method requires that you take all the money/assets in the IRAS no later than the end of the fifth year following your spouse’s year of death. This option is ONLY available if your spouse passes away before their required beginning distribution date.
4. If your spouse dies on or after the required distribution date you will be required to use the life expectancy method under 1.a. above.

The exception to the rules above are for a Roth IRA. One of the best things about a Roth IRA is that there are no required minimum distributions during the original owner’s lifetime. That lets the Roth assets grow untaxed for a longer period of time than a traditional IRA. But, once the Roth IRA is inherited the IRS requires the beneficiary spouse (or other nonspouse beneficiary) start taking distributions. Roth IRAs are always treated as if the spouse has died before the RBD. This allows the beneficiary to select either the life expectancy or five year method for distributions.

The other issue is whether or not you have “assumed” the IRA or inherited the IRA. The information above is for an inherited IRA. If you assume the IRA it is transferred into your own name and you must begin taking distributions based on your own RBD, not your deceased spouses. There are benefits to assuming an IRA, assuming you are younger than your deceased spouse. You have more time to defer distributions from traditional IRAs. An assumed Roth IRA will remain tax-deferred during your life time as long as the account has been held for five years (including the time it was held in your spouse’s name) and you are over 59 1/2.

The requirements for an inherited or assumed IRA are complex and this information is not intended to answer all questions. We recommend always contacting your CPA or financial advisor before embarking on any IRA distribution plan. For more information contact Sherry Radmore at 714.569.1000.