Non-Spouse IRA Beneficiary Rules
It’s hard enough coping with the loss of a loved one and non-spouse IRA rules compound the problem. Make the right decisions and your IRA may last for generations.
Make the wrong decisions and the government may end up with nearly half of your legacy.
Wouldn’t you rather have your name on your IRA benefitting your future generations for many years into the future? To do so, you must understand the non-spouse IRA beneficiary rules inside and out!
There are a few rules the non-spouse beneficiary should be aware of for starters. The rules aren’t easy, and these are just the main rules. The fact is most people should invest the time and money into a great financial planner who is an IRA expert to make sure the non-spousal IRA is handled properly!
Non-spouse IRA beneficiary rules explained
- ONLY move inherited funds as a direct transfer. Inherited IRA funds should be moved through a trustee-to-trustee transfer – NEVER use a 60-day rollover. The non-spousal beneficiary should never have use or control of the IRA funds during the transfer.
- Non-spousal beneficiaries must title the IRA correctly. The inherited IRA must keep the name of the decedent in the title or clearly indicate that it is an inherited IRA. Example: James Smith, deceased, IRA fbo Jane Jones. Titling the account incorrectly can invalidate the non-spousal IRA benefits.
- Don’t take a full distribution of the inherited IRA. If a non-spouse beneficiary takes a full distribution of the inherited IRA the entire IRA will be taxable. This is an irreversible error which can destroy the decedent’s legacy which otherwise could have lasted for generations.
- NEVER contribute to an inherited IRA. Only an account owner can make contributions to an IRA, an inherited IRA is not your IRA, it is the decedents IRA – therefore you cannot make contributions to an inherited IRA. Doing so will deem the entire IRA a taxable distribution in the year of the contribution.
- Are you a designated beneficiary? The distribution rules are more far more favorable for designated beneficiaries. A designated beneficiary is a live person who was named on the beneficiary form. A live beneficiary has a life expectancy, and will use the life expectancy table to distribute inherited IRA funds. When you inherit through an estate, the following rules apply:
- If the IRA owner died before his required beginning date (April 1 of the year after he turned age 70 and 1/2), then the beneficiary must use the 5-year-rule and distribute the inherited IRA funds in total within 5 years.
- If the IRA owner died after the required beginning date, funds must be distributed using the single life expectancy of the deceased account owner.
- Don’t miss any required distributions. Required minimum distributions which the decedent should have taken in the year of their death must be withdrawn and go to the beneficiary of the IRA. The RMD for the year of death is calculated as though the IRA owner lived for the entire year. The RMD does not go to the decedent or to the estate, unless the estate is the beneficiary. After the IRA owner dies, the beneficiary must take RMDs. If a beneficiary misses the RMD, there is a 50% penalty on the shortfall. This rule also applies to minimum required distributions from a Roth IRA.
- Rules for rolling over inherited funds from an employer plan. Non-spouse designated beneficiaries may do a direct rollover to a properly titled inherited IRA. Both the transfer of the funds and the beneficiary’s first RMD must be done by December 31st of the year after the plan participant’s death in order for the beneficiary to able to use the stretch rules for the IRA. If either of those deadlines is missed, the beneficiary will be forced to use the plan’s rules, even if the funds have been moved to an inherited IRA.
- Inherited IRAs can be aggregated – sometimes. You can aggregate IRAs inherited from the same account owner, as long as the beneficiary is a live person and not a trust:
- Example of IRA’s you CAN aggregate – You inherit two IRAs from your dad held at two different institutions. These accounts can be combined.
- Example of an IRA you CANNOT aggregate – You inherit an IRA from Dad and an IRA that was your Dad’s that had a trust as the beneficiary, and you were the beneficiary of the trust. These accounts should not be combined since there were two different beneficiaries – you and the trust.
Non-spouse beneficiary issues in summary
As you can see, the non-spousal IRA beneficiary rules can be tricky at best, and self-imploding at worst. Make the right moves!
Make sure you know the angles and IRA strategies that will ensure maximum protection for your retirement accounts.