Were You The Beneficiary Of An IRA Owned By A Decedent?

If you are/were the beneficiary of an IRA or a qualified defined contribution plan participant that was owned by someone that has died, there are new rules and regulations that must be kept in mind.  Gone are the days that you could stretch out the distribution for an extended period of time – now, the distributions must be completed in full within ten years in most cases.  And, all or a portion of those distributions are likely be income taxable. 

So, how can you maximize the value of the distributions?  It makes sense that the deferral of income and/or capital gains can maximize value.  However, ordinary income tax rates apply to taxable distributions (other than Roth IRAs) and favorable capital gains tax rates are available for distributions from taxable retirement accounts, including required minimum distributions.

What do you need to keep in mind? 

  • If the owner of the asset dies before becoming subject to required minimum distributions, the SECURE Act now requires that the designated beneficiary take distribution of the full amount by December 31 of the year containing the tenth anniversary of the owner’s death.  However, if the beneficiary can comply with pre-SECURE rules, there may be an exception to receive annual distributions based on the beneficiary’s life expectancy. 
  • Eligible Designated Beneficiaries include the owner’s surviving spouse, certain children depending upon age, a disabled individual or certain chronically ill individuals.
  • FYI – if there is no designated beneficiary, the entire account must be distributed and subject to income taxes by the end of the calendar year containing the fifth anniversary of the owner’s date of death if the owner had reached the required distribution date.

Remember that Roth IRAs are not included as the income tax has already been paid on these accounts. 

If you are charitably inclined, you may want to consider designating a charity as beneficiary since there would be no income tax consequences to a charity. 

It is advisable that you speak with a financial advisor or an attorney familiar with tax laws to help determine what the best option is for you and your individual situation.  The worst action you can take is to be reactive and withdraw the entire account before exploring your options to minimize your tax consequences. 

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About the Author

Kay Sowa is a paralegal in the Trusts and Estates Group at Capehart & Scatchard, P.A. She is an IRS Enrolled Agent, an Accredited Estate Planner®, and a Certified Trust and Fiduciary Advisor. She oversees the trust and estate administration practice for the firm. She is an accomplished author and lecturer who has frequently spoken on behalf of a number of organizations including the National Business Institute and the Institute of Paralegal Education.

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