IRA Beneficiary Withdrawal Rules
Inheriting a traditional or Roth IRA can be a substantial financial opportunity. You do need to learn the beneficiary withdrawal rules. The general rules are fairly straightforward, but the details are complicated. According to Teri Cettina of Bankrate.com, "The caveats are denser than trees in the Black Forest." Consult a tax professional when arranging the disposition of funds in an inherited IRA.
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Traditional IRA
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Anyone other than a spouse who inherits a traditional IRA must begin required minimum distributions starting no later than the end of the calendar year following the death of the account owner. These withdrawals must be made over a period no longer than the life expectancy of the beneficiary calculated during the year following the owner's death.
Undesignated Beneficiaries
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If the IRA owner did not name a specific beneficiary, the person who inherits is generally determined based on the terms of the IRA or by a probate court. The required minimum distribution is determined based on the owner's age at the time of death. If the owner was already age 70 1/2 and therefore making required minimum distributions, the distribution period is the owner's life expectancy as determined in the year of death. If the owner was younger than 70 1/2, all funds must be withdrawn within five years of the death.
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Rules for Spouses
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If a spouse is the sole beneficiary, the rules are simpler and offer some options. A spouse can simply roll the inherited IRA into an existing (or new) traditional IRA and may continue making contributions. Alternatively, the spouse can convert the IRA to a beneficiary distribution account. This allows the spouse to withdraw funds prior to his/her reaching age 59 1/2 without incurring early distribution penalties. A spouse may also transfer an inherited IRA to another person (normally a child) or simply cash out the IRA (although cashing out is likely to result in paying more taxes).
Roth Spousal Rules
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One feature of the Roth IRA is that there is no required minimum distribution. This applies to spouses who inherit a Roth IRA as well. The spouse can simply leave the IRA as is or roll it over into another Roth IRA and continue making contributions. A spouse may cash out the inherited Roth IRA. However, there may be tax consequences if this is deemed an early withdrawal (that is, if the withdrawal is made before the spouse reaches age 59 1/2 and the account has been in existence for at least five calendar years), so checking with a tax adviser would be prudent.
Other Roth Beneficiaries
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Anyone other than a spouse who inherits a Roth IRA must begin required minimum distributions on or before Dec. 31 of the year following the calendar year of account owner' death. The required minimum distribution is based on the beneficiary's life expectancy. Because this is a required withdrawal, the penalties for premature withdrawal of funds from a Roth IRA do not apply.
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