Beneficiary Ira Distributions

A beneficiary IRA is an inherited IRA from a spouse, parent or anyone who has named you as his or her beneficiary. A five-year rule stipulates that beneficiary IRA distributions must be made within a five year period, no later than December 31 of the fifth year after the IRA owner's demise, unless the beneficiary applies for other distribution options.

The age 70 1/2 rule no longer applies to beneficiary IRA distributions; beneficiary IRA withdrawal is mandatory. Total cashout of the inherited IRA will not be subjected to the early withdrawal penalty; however income taxes will be imposed. The beneficiary can also opt to take distribution in installments in order to spread out the taxable amount.

Another factor regulating IRA distributions after death is the RBD (Required Beginning Date) for the compulsory withdrawal. If the deceased has already started taking distributions, then the beneficiary can continue to receive the amount over the same duration established by the deceased, or over a period recalculated over the life expectancy of the beneficiary. If there are multiple beneficiaries, the shortest life expectancy period is chosen.

However if the original IRA owner dies before the RBD, then the beneficiary can opt to establish his own distribution schedule. Any distribution from inherited regular IRAs is subjected to income tax, except for the ROTH IRA. Non-spousal beneficiaries cannot make contributions to an inherited IRA or rollover to another IRA

More options are available for spousal beneficiaries. They can select to treat the inherited IRA as their own, thus avoiding minimum distribution rules. They can opt for a rollover into their own IRAs where they can invest the money in mutual funds, money market or stocks.

Spouses who inherit ROTH IRAs can choose to keep the account intact or rollover into a new or their existing IRAs. Another option is the disclaimer option, which means you give up the right to the account, which will be given to the next beneficiary in line. This option is usually taken for income and estate tax purposes