Required Minimum Distribution Calculations for IRA Beneficiaries
IRAs, or individual retirement accounts, are meant to help you save for retirement. If you die before you use all of the money, the account is passed on to your beneficiaries. If you are the beneficiary of an IRA, you must know the distribution rules for your inherited IRA.
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Types
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There are two types of IRAs you might inherit. The first type of IRA is a traditional IRA. A traditional IRA accepts tax-deductible contributions. A Roth IRA accepts only after-tax contributions. For traditional IRAs, the withdrawals are taxed at ordinary income tax rates. For Roth IRAs, the withdrawals are tax-free during retirement.
Effects
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The effect of the distributions on inherited IRAs is the same as for the original account owner. The rules do not change in this respect, with one exception. Normally, there is a withdrawal penalty for distributions made prior to age 59 1/2. However, the Internal Revenue Service (IRS) rules for inherited IRAs eliminates this so there is no early withdrawal penalty if you are taking distributions prior to age 59 1/2.
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Spousal Distributions
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If you inherit the IRA from a spouse, you may elect to treat the IRA as your own. You may take distributions from the IRA prior to your age 59 1/2 with no penalty, but you may also make contributions to the account. Alternatively, you may roll the IRA into your own IRA. At age 70 1/2, you must start taking distributions from your IRA using the IRS' required minimum distribution table in the appendix on table III of Publication 590. On that table, your age is associated with your life expectancy. You must take the IRA account value and divide it by your life expectancy. The resulting number is the required minimum distribution.
Non-Spousal Distributions
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If you are not the spouse of the original account owner, you must start taking distributions. You cannot roll the account over into your own IRA. Likewise, you cannot treat the IRA as your own or make contributions to it. You must either drain the account by Dec. 31 of the fifth year following the account owner's death or you must take lifetime distributions according to your life expectancy.
Considerations
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If you are not the spouse of the original account owner and you intend on using the IRA to fund your future retirement, consider taking enough of the IRA account balance to fund your retirement account with the maximum allowable annual contribution if this amount is more than the minimum required by law. This way, you can keep part of the inherited IRA invested, but you also make an effective transfer of funds to your new retirement plan. If the inherited IRA is a traditional IRA, consider using a Roth IRA for your own retirement since the distribution from the inherited IRA will be taxed anyway.
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References
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