Things to Consider as an IRA Beneficiary

As a beneficiary to an IRA you are most likely dealing with the loss of a loved one.  Depending on your role you also may be in charge of clearing out Mom or Dad’s house, settling the estate, making funeral arrangements, etc.  The last thing you want to deal with are some pesky IRS rules regarding retirement accounts.

The point of this post is to not cover all the options a beneficiary has when they inherit and IRA, it’s to make sure you are aware of a often overlook rule.

The best way to illustrate in this case would be by using an example:

  • Betty outlived her husband David passed away in April of 2012
  • Betty’s four children (Sheila, Sherrie, Mary and Victor) are listed as her beneficiaries for her IRA account
  • Betty was 72 when she passed and was taking her required minimum distribution out each year.  The withdrawal was set up to come out automatically from her mutual fund account on December 1st each year
  • After Betty passed away the oldest (Sheila) quickly sprang into action and had the estate settled in the matter of months.  Since the IRA account had beneficiaries it did not have to go through probate.
  • Sheila helped her siblings get their share of the IRA.  Sheila and Sherrie set up beneficiary IRA accounts at the mutual fund company and Mary and Victor chose to take their share ($10,000 each) out as a cash distribution.

The problem:

Since Betty was over the age of 70.5 her distribution must be satisfied by the end of the year.  Since her distribution was done at the end of the year she did not satisfy her requirement. 

The solution:

Let’s say that Betty’s RMD was $900 for the year.  Even though that amount did not come out it can be satisfied by her beneficiaries by the end of the year.  In this case the distributions by Mary and Victor more than satisfy the $900 that needed to come out by the end of 2012.  Since the RMD amount was satisfied by their siblings, Sheila and Sherrie are not required to take out distributions in 2012.  However, they chose to create beneficiary IRA accounts and must begin distributions in 2013 based on their life expectancy. 

Why the concern?

Not taking the RMD for a year is one of the biggest penalties the IRS has (50%).  Often financial institutions are very helpful in walking you through the process.  However, there are many inconsistencies across the industries and this is one area that could potentially get missed in settling an estate.

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