When Must a Beneficiary of a Decedent's IRA Take Withdrawals?
If your child or grandchild passed away and named you as the beneficiary of her individual retirement account (IRA) you have the same options as other non-spouse beneficiaries: you may withdraw the entire account within five years or begin taking required minimum distributions (RMDs) beginning the year after the original owner's death.
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Significance
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The Internal Revenue Service (IRS) has two sets of rules for IRA beneficiaries. All non-spouses are required to withdraw money from the account shortly after the original owner's death. Only spouses whom the original owner named as the sole beneficiary of the IRA may treat the account as their own. This rule allows spouses to continue making contributions to the account or roll it into their own investment assets and delay taking contributions.
Required Minimum Distributions
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If you decide to take required minimum distributions, or RMDs, you must take your first withdrawal from the account by Dec. 31 the year following the original owner's death. You can calculate your RMD by dividing the account's balance the previous Dec. 31 by your life expectancy according to IRS tables. The IRS publishes life expectancy tables for this purpose in its Publication 590. As a non-spouse, you can look up how much longer the IRS thinks you'll be around in Table I, titled "Single Life Expectancy."
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RMDs and the Required Beginning Date
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If you inherited a traditional IRA, you may be required to calculate RMDs based on the original owner's life expectancy rather than your own. RMDs are not only for beneficiaries; traditional IRA owners must take them as well beginning the year they turn 70 1/2. IRS rules stipulate that if the original owner passed away on or before her required beginning date and her life expectancy was longer than yours, you are required to take RMDs based on her life expectancy. Additionally, you must take the RMD she was required to take the year of her death if she did not do so.
Five-Year Option
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If you decide against taking RMDs, you must empty the account by Dec. 31 of the fifth year following the original owner's death. For instance, if your descendant died at any point during 2009, the clock would begin ticking on Jan. 1, 2010 and you would need to withdrawal the account's balance by Dec. 31, 2015. If you go this route, you could theoretically not take a withdrawal until 2015; or you could withdraw a portion of the account each year. The choice is yours.
Warning
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If IRS rules stipulate that you must take an RMD or empty the account within five years and you fail to do so, the agency levies a 50 percent penalty on the amount you should have withdrawn. The IRS has this rule to prevent IRA beneficiaries from keeping accounts open longer than they are allowed. Because IRAs shelter assets from taxes, beneficiaries must make withdrawals eventually.
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