Stuck with the Five-Year Rule? Think Again
If you inherit an IRA, especially if it is a larger one, you may be afraid of being stuck with the five-year distribution rule. If this rule applies, your IRA must be entirely emptied in five years which can be a serious tax hit. Fortunately, you are much less likely to be stuck with the five-year rule than you may think.
Under the tax rules, if you were named as the beneficiary on the IRA beneficiary designation form, you may be able to choose the five-year rule, but it cannot choose you. If you inherited the IRA funds from an IRA owner who died before their required beginning date (April 1 of the year following the year they reached age 70 ½) you can choose the five-year rule, but you will never be forced to use it. This is true even if you miss a required minimum distribution (RMD). If that happens, tax law does not require that you use the five-year rule. Instead, you may be subject to penalty on the RMD that you missed but you can continue taking RMDs over your life expectancy.
What if the IRA owner died after the required beginning date and you are named on the beneficiary designation form? The five-year rule is not on the table under the tax regulations. It isn’t even an option.
So, what are those rare times when the five-year rule does apply? This can happen if you inherit IRA funds not by being named directly on the beneficiary designation form but instead through an estate. If that happens there is no designated beneficiary. If the IRA owner dies before the required beginning date, that is the one and only time under the tax rules that you will be stuck with the five-year rule. If the IRA owner dies on or after their required beginning date, you escape the five-year rule and can take distributions over the remaining life expectancy of the deceased IRA owner.
It is important to keep in mind that while most IRA documents do not limit the options to a beneficiary that are otherwise available under tax law, a few do. It is possible that your inherited IRA might include language that would limit you to the five-year rule or would require it as a default for a missed RMD. In these cases, it is your IRA document and not the tax rules that is leaving you stuck with the five-year rule.
Content Citation Guidelines
Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.
Please be advised that prior to distributing re-branded content, you must send a proof to email@example.com for approval.
For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.
For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Please contact Matt Smith at firstname.lastname@example.org or (516) 536-8282 with any questions.