RMDs For Non-Spouse Beneficiaries

Decisions Required Of Non-Spousal Beneficiary

When the owner of an IRA or similar retirement account passes away, and you are chosen to receive the account, you will become the owner of an Inherited IRA, also called a Beneficiary IRA. With this new account comes the responsibility of taking Required Minimum Distributions in a timely manner. 

Deadline For Taking RMDs

Most individuals are required to begin taking RMDs by December 31st of the year after the date of passing. Here are a few ways that you may consider taking the withdrawls. The details for what we describe below can be found on the IRS website, specifically Form 590-B.

Options For RMDs

There are different ways to approach the withdrawals from an Inherited Beneficiary account. You may want to consider some things before selecting how to proceed. For example, it may be helpful to review your cash flow needs, tax situation, long-term retirement plan, your age, and the age of the decedent when selecting from the choices provided by the IRS. 

The Lump Sum Method

The Lump sum method allows you to take all of the money out of the account, pay taxes on the funds as personal income, and then use the money however you like. You are not penalized for early withdrawal if you are not 59-1/2 years of age or older. But, you do have to be mindful that having this lump sum of money added into your income for that year could put you into a higher tax bracket, and result in more taxes for the year. 

The lump sum method is a viable option for withdrawing the funds, but you may find the Life Expectancy Method to be a better option because of the potential for tax-deferred savings.

The Life Expectancy Method

The Life Expectancy Method is another way to take the RMDs for a non-spouse beneficiary account. With this method, you open a new IRA in your name, called an Inherited or Beneficiary IRA. This account now belongs to you, but the decedent, who is the individual that passed away, will be referenced on the account. 

Upon receiving the account you must begin taking the annual RMD using your age, or using the previous owner’s age, typically whichever is younger. The RMD must be started no later than December 31st of the year following the original account owner’s death. This can be a complicated calculation, it changes every year, and the deadlines are very important. If you are younger than the previous account owner, and you choose your life expectancy payout instead of theirs, this would be called a stretch IRA, since you are stretching out the payments over a longer period of time. It is not an official account title, but a term that defines a method of payment. Withdrawals before the age of 59 ½ are not penalized. However, the funds you receive from taking the RMD are taxed as income.  

Understanding The Five Year Rule

The Five Year Rule is one more option that may be available to you if the original account holder passed away prior to the age of 70-½. This option gives you up to five years to withdraw all of the funds from the new Inherited IRA. You would have to elect this option when you open the new account. You may take withdrawals during this time period, and the funds will be taxed as income. All withdrawals must be taken by December 31, of the year that marks the 5th anniversary of the original owner’s death. With the five year rule, withdrawals before the age of 59 ½ are not penalized. But keep in mind, the withdrawals are taxed as income. 

Other Things To Consider 

If there are multiple beneficiaries, or the beneficiary is a trust or a charity, then special rules apply. If you plan to disclaim the inherited account, be aware that the timeline for this decision is only 9 months of the date of passing, and in some situations is a strategy to utilize. There are no tax penalties for withdrawals from an inherited account. However, any RMDs that the original owner owed must be taken on time to avoid excise taxes.  

Taking A Beneficiary RMD Is Complex

The option selected for taking an RMD from a beneficiary account can vary from person to person, and the research can be complicated and somewhat confusing. We have touched on some of the main topics here, but further discussion may be beneficial. There may be deadlines and tax ramifications if a mistake is made. To learn more visit the IRS website or contact us. As advisors we help individuals and families navigate the complexities of inherited retirement accounts. Contact us to learn more.