If you are the beneficiary of a traditional Individual Retirement Account (IRA) but are not the spouse of the deceased owner there are special rules which must be followed carefully to avoid a large tax bill. Now is the time to start thinking about next year’s taxes, not waiting until the last minute when it might be too late to avoid paying more taxes than necessary.
Non-spouse beneficiaries of any age who want to “stretch” the IRA over their own life expectancies must start the Required Minimum Distributions (RMD) the year following the year the IRA owner died. Heirs will have to pay income taxes on the distributions from the IRA.
Additionally, non-spouse beneficiaries cannot roll an inherited IRA into their own IRA. A new IRA must be established with the title stating the decedent’s name and noting that the account is for a beneficiary. If there is more than one non-spouse beneficiary, a separate beneficiary IRA must be established for each individual heir. If the IRA is not split between the multiple beneficiaries, the age of the oldest beneficiary will be used to calculate the RMDs, which will shorten the number of years the money can grow tax deferred.
If one of the beneficiaries is an entity such as a charity or living trust the RMD distribution for the entity beneficiary must be taken by September 30th of the year following the year the owner dies.
The regulations regarding the beneficiaries of an IRA are very specific and must be followed to avoid an unnecessary tax burdens for the beneficiaries. For example, if the IRA owner died after starting to take his or her RMDs but had not taken the RMD for the year in which he or she died, the non-spouse beneficiary is required to take that RMD.
While these regulations appear to be extremely complicated, the best advise for the beneficiary is to carefully study the rules or seek the advice of a financial or tax expert. Paying unnecessary income tax is never a wise move.
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