The main topics of this lesson are: IRA Beneficiaries – Spouse and Non-Spouse; Roth IRA; and Trust as Beneficiary. For this lesson refer to the Study Notes and watch the video for a synopsis.
Most married IRA owners name their spouse as their primary beneficiary and their children as secondary
beneficiaries of their IRA accounts. Spouses have greater leeway as to what can be done with IRA funds
than children or other beneficiaries.
Spouses may transfer the funds into another IRA account of the same type under their own name and
ownership and take/begin any required RMD based on the spouse’s age. These rules only apply if the
funds are transferred into an IRA account in the spouse’s name and do not require that the spouse be
the only beneficiary of the plan.
If the spouse is not the beneficiary or they choose to leave the funds in the name of the deceased, then
the following options are available:
Withdraw the funds immediately
Rollover to an inherited IRA and begin distributions
If the funds are rolled over to an inherited IRA and it was a traditional plan there will be an annual RMD
based either on the life expectancy of the beneficiary or the original owner of the IRA.
Distributions from Traditional and SEP IRAs are taxable when received. For beneficiaries that are less
than 59.5 there are no tax penalties for taking the RMD from an inherited IRA – in fact they are required
to do so. Inherited IRA RMDs are not eligible for the charitable gift option discussed in the previous
Roth IRAs are not taxable as ordinary income to the beneficiary. However, they must be dissolved within
5-years of the death of the owner.
If a trust is named as the beneficiary of an IRA, there are two distribution alternatives dependent upon
the age of the owner at death.
1) if the owner died before reaching 70.5 (RMD age) then the maximum distribution period of
the IRA is the life expectancy of the oldest trust beneficiary.
2) if the owner died after reaching RMD age then it is the longer of the life expectancy of the
oldest trust beneficiary or the deceased.
Of course, a full distribution of the IRA can be made to the trust at any time. However, if the income is
taxable it is important to keep in mind that tax rates for trusts are higher than for individuals.
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