IRS Rules on the Beneficiary of an IRA Distribution
Part of setting up an individual retirement account, or IRA, is naming a beneficiary to inherit the account when you die. The Internal Revenue Service has a number of rules on minimum annual distributions to beneficiaries and multiple beneficiaries, as well as special options for spouses who inherit IRAs and for living trusts that inherit IRAs.
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Beneficiaries
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When an account owner turns 70 1/2, he has to make a required minimum distribution every year, based on Internal Revenue Service life-expectancy tables. If the owner dies before that age, the beneficiary must make minimum distributions based on his own life expectancy; if the owner was older than 70 1/2, a beneficiary can base distributions on the owner's age. A beneficiary may also choose to withdraw the entire account within five years; in that case there's no minimum distribution before the fifth year.
Spouses
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The spouse of a deceased IRA owner has an option no other beneficiary does: to treat the IRA as if it were his own account, rather than an inheritance. Instead of having to start mandatory minimum distributions almost immediately, the spouse can wait until reaching age 70 1/2 before distributions become mandatory. The spouse can also elect to be treated like an ordinary beneficiary, if that's more advantageous. With a Roth IRA, the spouse has the added option of postponing mandatory distributions until the year the deceased would have turned 70 1/2.
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Special Cases
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IRA owners are free to name more than one beneficiary. If each beneficiary receives a separate IRA, each beneficiary calculates her own minimum distribution. If several beneficiaries inherit a common account, the minimum distribution is based on the life expectancy table for the oldest beneficiary; the minimum can be one person's withdrawal, or their combined total. If the IRA is set up to pay the contents into a trust -- and the transfer meets IRS requirements -- trust beneficiaries are bound by the same IRA rules as if they were beneficiaries of the IRA itself.
Considerations
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You have to recalculate the minimum withdrawal every year to take account of how the IRA assets may have grown or dwindled. You're always free to withdraw more than the minimum, but no matter how much you take out in one year, you have to withdraw a minimum the next, as long as there's money in the account. If your distribution is less than the minimum, the IRS will levy a 50 percent tax penalty on the shortage: If your minimum is $300 and you withdrew $150, that translates into a $75 penalty.
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