Navigating the death of a close family member can be difficult to endure. When a loved one is lost, the first thoughts likely won’t be about what to do with their IRA. But for beneficiaries, it is important to make wise decisions to avoid excess taxes and penalties. We thought we’d send along some information that can help you or someone close to you navigate what to do in the event of being of beneficiary on an IRA account. Due to changes to the beneficiary rules in the SECURE ACT, the following information applies to deaths on or after January 1 of 2020.
Everyone: Any beneficiary can take all the account assets as a lump sum payment without incurring a 10% early withdrawal penalty. However, if it’s a traditional IRA, income taxes will be paid on the amount distributed, which might push into a higher tax bracket. If it’s a Roth IRA that is less than five years old, taxes will be owed on the earnings. If the benefactor was over the Required Minimum Distribution (RMD) age, it’ll need to be determined whether the benefactor took their RMD for the year they passed away. If they didn’t, beneficiaries must do so before the end of the calendar year or incur a 50 percent penalty on the RMD amount.
Surviving spouse: A surviving spouse has the most options. They can be designated as the owner of the spouse’s account, transfer the funds into individual IRAs, or open an inherited (or stretch) IRA. With the latter, RMD amounts will be based on age and be recalculated each year based on the factors in the IRS Single Life Expectancy Table.
Other eligible designated beneficiary: If the beneficiary is a minor, chronically ill, disabled, or less than 10 years younger than the deceased, a stretch IRA can be opened. When minors reach the age of majority, the ten-year distribution rule applies.
Another relative or friend: For those that don’t fall into the categories above and don’t choose to take a lump payment, there will be the need to create an inherited IRA account and transfer the funds. No new contributions can be made to the account. There are no annual required distributions, but all the money must be withdrawn within 10 years.
COVID exceptions: Because of COVID, all RMDs have been suspended for 2020. This waiver includes inherited accounts. Consult with your tax advisor regarding the impact of COVID-related legislation on the ten-year liquidation requirement.
This doesn’t cover all the rules and options regarding inherited retirement accounts but gives a general overview of the options. We would be happy to explain different possibilities and their ramifications, work with your attorney and accountant to guide you through any decisions you may face in the future. If this is a situation you find yourself in in the future, please don’t hesitate to reach out.