Can Inherited IRA Distribution Method be Changed/Undone?

Submitted by Roselyn Siino on Thu, 2020-02-06 22:46

Client inherited IRA from relative. DOD was December 2019.

Previous custodian elected to do the 5 year withdrawal. There are 4 non-spouse beneficiaries on the account. Sounds like the custodian automatically made this election…

Can the distribution method be changed, particularly since this just happened a month or so ago? Ideally each beneficiary would open their own Inherited IRA and take the funds over their lifetimes, since the death occurred prior to 2020 and is not subject to Secure Act, is that correct?

That is, assuming the custodian and IRS will allow us to undo this mistake.

Any advice is greatly appreciated.



Submitted by Alan - IRA critic on Fri, 2020-02-07 00:23

  • Custodians do not make this election, the beneficiaries do. The default method in almost all IRA contracts is life expectancy, not the 5 year rule. If the 5 year rule question even came up, that indicates that the relative passed prior to their required beginning date. And that means that there was no 2019 RMD required that any of these beneficiaries have to worry about completing for 2019. Each beneficiary has until 12/31/2020 to establish a separate inherited IRA. They can each then calculate their 2020 beneficiary RMD using the life expectancy method. They can take their 2020 RMD from either the current custodian’s inherited IRA or from the new account they establish anywhere they wish. It does not matter as long as the 2020 RMD is completed by the end of this year.
  • Note that if the relative’s IRA beneficiary was their estate, then the 5 year rule is mandatory and that might explain what you are saying about the custodian and 5 years. But if the beneficiaries were named as such on the relative’s IRA, they cannot be held to a 5 year rule by the custodian. And even a beneficiary elected the 5 year rule in error, that election can be changed at least up to the end of this year.


Submitted by Roselyn Siino on Mon, 2020-02-10 18:48

Thanks, I’m unclear on what the 5 year rule has to do with the RBD.  Does this mean if the decedent was not taking RMDs, the custodian automatically assumes 5 year rule unless you change the election?



Submitted by Alan - IRA critic on Mon, 2020-02-10 21:26

The 5 year rule can only apply for death prior to the RBD. But that does not mean it does apply because almost all IRA contracts specify life expectancy as the default method regardless of when the decedent passes. If there are multiple beneficiaries and some elect the 5 year rule, the others can still create separate inherited IRA accounts by the deadline and use life expectancy. Note that if the estate inherited the IRA and owner passed prior to the RBD, the 5 year rule is mandatory for the estate and estate beneficiaries..



Submitted by Roselyn Siino on Mon, 2020-02-10 19:12

Also, do all 4 of the beneficiaries need to open the Inherited IRA in their name by the 12/31 deadline? If one of them does not does that mean all the remainng bene’s are unable to benefit from the life expectancy method? Or is the distribution method looked at on an individual basis (ie. I can still benefit from this method even though the other bene did not open their account)



Submitted by Alan - IRA critic on Mon, 2020-02-10 21:32

This is a question without a clear answer due to the way the Regs are worded. However, a beneficiary who meets the separate account deadline should proceed with RMDs based on their own age and disregard what the others do or do not do. I do not believe that the IRS has challenged that approach. If there were 4 beneficiaries and only one established the separate account, the other 3 would have to use the age of the oldest of those 3 to calculate their beneficiary RMDs. While rare, it would also be possible for one beneficiary to elect the 5 year rule, while others use life expectancy. This way, the actions of one beneficiary does not have a negative effect on the others.



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