The 3 Categories of IRA Beneficiaries You Must Know | Ed Slott and Company, LLC

The 3 Categories of IRA Beneficiaries You Must Know

By Beverly DeVeny, IRA Technical Expert

Follow Me on Twitter: @BevIRAEdSlott

There are three categories of beneficiaries that might want to stretch distributions from their inherited IRAs. A beneficiary's options will depend on which category they find themselves in.

1. The Estate – this category has two categories of its own.

  • Account owner died before age 70 ½ - the beneficiaries of the estate must use the 5-year rule
  • Account owner died after age 70 ½ - the beneficiaries of the estate must use the remaining life expectancy of the deceased account owner, had he lived, for calculating required distributions

2. A Trust – If the trust is the only beneficiary named on the beneficiary form then there is only one beneficiary of the retirement account – the trust. There are many nuances when determining the age to use for calculating required distributions, but it will NOT be the age of each trust beneficiary since you only have one beneficiary. It is recommended that the trustee of the trust work with an advisor with specialized knowledge in this area and that may not be the attorney who drafted the trust. One key point to remember – DO NOT TRANSFER THE IRA ASSETS INTO THE TRUST – either during life or after death. That will be a taxable distribution and there will be no more retirement account.

3. Individual Beneficiaries – This is generally the best category for a beneficiary to be in. The inherited account should be split into inherited accounts for each beneficiary by the end of the year after the death of the account owner. Then each beneficiary can use their own age to stretch distributions over their lifetime.

There is one thing that is common to all beneficiaries. That is the titling of the inherited account. The deceased account owner’s name should remain in the title.

For example: John Smith, deceased, IRA for the benefit of – the estate, or the trust, or the individual beneficiary – whoever inherited the account.

 

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