By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott
You inherited an IRA or a Roth IRA. Since you are not age 70 ½ yet, you did not think you had to take required distributions (RMDs) or maybe your advisor told you that. WRONG!!!
A non-spouse beneficiary generally must take his first required distribution in the year after the account owner's death.
Here are the rules for a beneficiary that is named on the beneficiary form (or is named through the document default provisions). These rules do NOT apply to beneficiaries who inherit through an estate. They may be the same for a beneficiary who inherits through a trust, but that is a way more complicated situation and you should be working with a knowledgeable advisor to determine how RMDs to the trust will be calculated.
We are going to assume that you have set up a properly titled inherited IRA and that you have only moved funds in a direct transfer. Any check payable to a non-spouse beneficiary is a taxable distribution and there is NO way to fix it. The inherited account for a beneficiary must be established by December 31st of the year after the account owner’s death in order for the beneficiary to use his own life expectancy.
All non-spouse beneficiaries must take their first distribution by the same December 31st deadline. It doesn’t matter how old you are – 2, 22, or 92. You look up the age you are on that December 31st on the Single Life Expectancy Table to get your life expectancy factor. The table can be found in IRS Publication 590 which you can get for free on their website, www.irs.gov. Just click on Forms and Publications and in the search box type in 590.
Once you have the factor, the only other thing you need is the prior year-end account balance. If you are calculating a distribution for 2012, then you need the 12/31/11 account balance. You divide the account balance by your life expectancy factor to get the amount of your RMD for the year. You can take the distribution at any time during the year, as long as you take it by December 31st of the year. In each year after that, you reduce your life expectancy factor by 1 to get the factor for the current year.
What happens when you miss one or more of your RMDs from the inherited account? You have to look at the IRA account agreement to see what their default option is for non-spouse beneficiaries. If it defaults to a payout in five years, you are going to be stuck with that option. You will have to take all the funds out of the inherited IRA within five years and pay all the income tax due. Hopefully, the document will default to the life expectancy or “stretch” option and you will be able to make up all the missed distributions. You will have to file IRS Form 5329 for each year that you missed a distribution because a 50% penalty will apply. We recommend that you work with a knowledgeable advisor if you have to make up missed distributions.
- A non-spouse named beneficiary inherits an IRA
- Required distributions must begin in the year after the account owner's death
- There is a 50% penalty for required distributions that are not taken