IRA Withdrawal for Beneficiaries
Beneficiaries of an Individual Retirement Account have several options depending on their relationship to the IRA owner. A surviving spouse has the most options. Non-living entities such as trusts or charities have the fewest options.
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Surviving Spouse
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If you are a widow, you are not required to take any distributions from the IRA. In fact, you can continue the IRA as if it is your own, making annual contributions, taking distributions or combining it with your other IRA accounts. As the surviving spouse, you can also take a lump-sum distribution, take distributions over five years or roll the IRA into a beneficiary IRA. The beneficiary IRA allows you to take non-penalized distributions over your lifetime, even if you are not yet 59 1/2 years of age unlike continuing the IRA as your own.
Non-Spousal Beneficiaries
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A child, grandchild or any other living person who inherits an IRA has all the same options as a surviving spouse except continuing the IRA. The options allow beneficiaries to control tax issues, even if just moderately. Any distribution from a traditional IRA is added to the beneficiary's income tax return. The larger the IRA distribution, the larger the tax bill. Stretching payments over five years or opening a rollover beneficiary IRA reduces distributed amounts. Even with a Roth IRA, stretching is a wise option because distributions are tax-free but still can grow over the stretched time frame under the tax shelter. Once the money is out, it is taxable under any other investment structure.
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Non-Living Beneficiaries
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Non-living beneficiaries include estates, trusts and charities. There is only one distribution option with non-living beneficiaries, which is the lump-sum distribution. One of the powers of an IRA to living beneficiaries is the ability to avoid probate. This benefits is lost if the estate is named, requiring that the assets be included for payment of debts in the estate prior to benefits being paid to beneficiaries.
Special Tax Considerations
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If the deceased IRA owner was taking annual Required Minimum Distributions from the IRA, you must take the RMD regardless of what type of beneficiary you are. The RMD must be taken by December 31 the year following the date of death. If an RMD is required based on the owner's age, then beneficiaries may deduct that amount against any federal estate taxes.
One of the major tax issues with all IRA accounts is federal estate transfer taxes, which are 35 percent on estates over $5 million based on 2011 IRS regulations. It doesn't matter if anything is taken out or not. Distribution methods help mitigate the overall tax issues.
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