Don’t Miss Taking a Distribution From Your Inherited IRA by Year-End

Tuesday, December 02, 2014

By Joe Cicchinelli, IRA Technical Expert
Follow Me on Twitter: @JoeCiccEdSlott

If you’re the beneficiary of a deceased IRA owner, December 31, 2014 is an important date. If the decedent died in 2013 or earlier, you generally have to take a required minimum distribution (RMD) from the IRA by year-end to avoid a 50% penalty for not doing so. Here’s how it works.

Let’s say that you inherited an IRA from someone other than your spouse. And let’s further assume that the deceased IRA owner died in 2013 or before. As a non-spouse IRA beneficiary, you cannot rollover, transfer, or elect-to-treat the decedent’s IRA as your own IRA. So, you can’t delay taking RMDs until the year that you would be age 70 ½, as you can with your own IRA. You have to start taking RMDs, sometimes known as death distributions or death RMDs, at some point. When exactly do you have to start taking them? The answer depends on when the IRA owner died. Also, when we talk about inherited IRA RMDs, these rules also apply to inherited SIMPLE and SEP IRAs as well.

If the IRA owner died before his required beginning date (RBD), which is April 1 of the year after he turned age 70 ½, then generally you have two options:

  1. The 5-year-rule
  2. The single life option (a.k.a. the “stretch IRA”).

In most cases, you’re better off choosing the stretch IRA because you can take the funds out over your single life expectancy starting the year after the IRA owner died.

So, let’s assume the IRA owner died in 2013 at age 68 (i.e., before her RBD) and you chose the single life expectancy option. You have to take an RMD by December 31, 2014 based on your single life expectancy using your age in 2014. If you don’t take anything, or take less than the RMD, you’ll be subject to a 50% penalty on the shortfall. (Note: You might be able to get the penalty waived by the IRS for reasonable cause.) Every year afterward, you have to take an RMD based on your remaining single life expectancy factor, subtracting one for each year that passes.

If the IRA owner died on or after her RBD, you must generally take an RMD each year starting the year after she died, based on your single life expectancy. Inherited Roth IRAs are subject to the same death distribution rules that apply when a Traditional IRA owner dies before his required beginning date.

 

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