Presented by David Corwin
What Distribution Options Are Available at the Death of a Traditional IRA Owner?
Here’s where “stretch” IRA planning can come into play. Required minimum distributions from a traditional IRA cannot be avoided during your lifetime. Required minimum distributions, however, do not necessarily deplete the value of a traditional IRA. Instead, the value remaining can be substantial at an IRA owner’s death, when careful advance planning can serve to stretch the tax deferral into the future.
The options available to an individual who inherits a traditional IRA include the following:
1. Immediate Lump-Sum Distribution: Surrender the inherited IRA and receive the entire value in a lump sum. The taxable value of the IRA is then included in the beneficiary’s income in the year of surrender.
2. Distributions Over Five Years: If the IRA owner was under age 70-1/2 at death, the beneficiary can take any amounts from the inherited IRA, so long as all of the funds are distributed by December 31 of the year containing the fifth anniversary of the original IRA owner’s death. This option is not available if the IRA owner was over age 70-1/2 at death.
3. Life Expectancy: The IRA assets are transferred to an inherited IRA in the beneficiary’s name, where the date by which required minimum distributions must begin depends on whether or not the beneficiary is the surviving spouse and by the IRA owner’s age at the time of death.
For spouse beneficiaries:
If the deceased spouse was younger than age 70-1/2 at the time of death, the surviving spouse may delay required minimum distributions until the year in which the deceased spouse would have reached age 70-1/2.
If the deceased spouse was older than age 70-1/2 at the time of death, the surviving spouse must begin taking required minimum distributions by December 31 of the year following the spouse’s death.
“Stretch” IRA: At a Traditional IRA Owner’s Death
For non-spouse beneficiaries:
Required minimum distributions from the inherited IRA can be spread over the non-spouse beneficiary’s life expectancy, with the first payment required to begin no later than December 31 of the year following the year of the IRA owner’s death.
The life expectancy option can be used to provide a current stream of income, while still extending the tax deferral of funds in the Inherited IRA by stretching the required minimum distributions over the beneficiary’s life expectancy…potentially a long period of time in the case of a younger beneficiary.
Spouse IRA beneficiaries, however, have an additional option to consider:
Spousal Transfer: Under this option available only to a surviving spouse who is the sole IRA beneficiary, the spouse beneficiary treats the inherited IRA as his/her own and the IRA assets continue to grow tax-deferred. IRA distribution rules are then based on the spouse’s age, meaning that distributions may not be available prior to the spouse’s age 59-1/2 without paying a penalty tax and required minimum distributions must begin by the spouse’s age 70-1/2.
With a spousal transfer, a surviving spouse who does not need current income can continue the tax-deferred growth of the entire Inherited IRA until he/she reaches age 70-1/2.