You Inherited a Beneficiary IRA? Here’s What You Need to Know!
In a recent post, I outlined the key points to keep in mind if you inherit an IRA from a deceased account owner. In this post I' set forth the information you need to know if you inherit an IRA from another beneficiary.
In this situation, a beneficiary who inherited an IRA from a deceased account owner dies before he fully liquidates the inherited IRA. The successor beneficiary must know how the distribution rules affect her.
The successor beneficiary must first determine when the prior beneficiary inherited the IRA from the account owner. (This is the date of the IRA account owner’s death.) Under current tax rules, if the original beneficiary inherited the IRA on or before December 31, 2019, the distribution rules applicable to a successor beneficiary will differ from the rules that will apply if the original beneficiary inherited the IRA after December 31, 2019. Confused much? Well, let’s look at both situations.
Scenario 1 — the original beneficiary inherit the IRA on or before December 31, 2019: If so, the successor beneficiary will have 10 calendar years following the year of the original beneficiary’s death to completely liquidate the IRA. This 10 year liquidation period will apply to any individual named as successor beneficiary. For instance, if the successor beneficiary is the original beneficiary’s spouse, he or she must liquidate the entire balance of the IRA with the 10 year term.
The successor beneficiary is not required to withdraw any minimum amount at any time during the term. She may wait until the very end of the term to liquidate the IRA. The IRS will penalize her if she does not fully liquidate the account by the end of the 10 year term. The penalty will be equal to 50% of the balance remaining in the IRA at the end of the term. The IRS will levy the penalty each year until the IRA is fully liquidated.
Scenario 2 —the original beneficiary inherit the IRA after December 31, 2019: If so, the distribution rules applicable to the successor beneficiary will depend upon the status of the deceased original beneficiary at the time of his death. If the original beneficiary was an “eligible designated beneficiary,” or “EDB,” the successor beneficiary will have 10 years from the year of the original beneficiary’s death to liquidate the inherited IRA.
An EDB may be: a) the surviving spouse or a minor child of the account owner: b) a disabled or chronically ill individual: or c) an individual not more than 10 years younger than the deceased account owner. The tax code deems all other individual beneficiaries to be “designated beneficiaries.” (A successor beneficiary will never be an EDB under the tax code.)
If the original IRA beneficiary was merely a designated beneficiary, then the successor beneficiary has only the remainder of the original beneficiary’s 10 year term to complete the IRA liquidation. She does not get a new 10 year term to liquidate the IRA.
Again, the beneficiary need not take minimum distributions each year during the remaining term. However, the IRS will impose the 50% penalty if the account is not fully liquidated by the end of the original beneficiary’s 10 year term. (The successor beneficiary will have to move quickly to liquidate the IRA if the original beneficiary died late in the last year of the 10 year term.)
The rules governing distributions from an inherited IRA or other retirement account are extremely complex and contain traps for the unwary. If you are struggling to manage an inherited IRA or other retirement account, give us a call. we can help.