Inherited IRA rules may seem straight forward, when a loved one passes away and you are the named beneficiary, you take over the IRA and have to begin taking distributions. But when the death of a beneficiary occurs or a trust gets involved, sometimes incorrect information can be given. Here are some common misconceptions to look out for:
- Death of a Beneficiary and Required Minimum Distributions (RMDs) – If the owner of an IRA passes away in year one and the non-spouse beneficiary passes away in year two, before taking the RMD, some may believe this situation results in no RMD being required. This is not true, even if the death of the beneficiary takes place before the Inherited IRA is set up.
- Beneficiary Rollover and See-Through Trusts – Internal Revenue Code [402(c)(11)] states that when qualified retirement plan death benefits are payable to a beneficiary other than the surviving spouse, the plan must offer that beneficiary the option of having the benefits transferred directly to an Inherited IRA. Some may think this is optional, especially when a trust is involved. If the trust is a see-through trust (meaning all income that goes to the trust passes through to the beneficiaries) then a direct rollover must be made available.
- Life-Expectancy Payout Option for See-Through Trusts – More common than the Rollover IRA discussion above is the case where administrators believe since a trust is a non-human beneficiary, due to not being able to calculate a life expectancy, that the life-expectancy payout option is not available. If the trust qualifies as a see-through trust, the life-expectancy method is available for post-death RMDs, and will use the oldest beneficiary’s age, if multiple beneficiaries exist.
Long story short, it is possible to get/receive incorrect information. This is where financial planners are valuable in making sure all ducks are in a row when dealing with the financial aspect of a passing family member or friend.
Content in this material is for general information only and is not intended to be a substitute for specific individualized tax or legal advice. Future laws can change at any time. We suggest that you discuss your specific situation with a qualified tax or legal advisor.