In 2020 and later, options for a beneficiary who is not the spouse of the deceased account owner depend on whether they are an “eligible designated beneficiary.” An eligible designated beneficiary is
- Spouse or minor child of the deceased account holder
- Disabled or chronically ill individual
- Individual who is not more than 10 years younger than the IRA owner or plan participant
An eligible designated beneficiary may
- Take distributions over the longer of their own life expectancy and the employee’s remaining life expectancy, or
- Follow the 10-year rule (if the account owner died before that owner’s required beginning date)
The chart below describes the three options for eligible beneficiaries who inherit qualified plans. As always, if you have any questions, please do not hesitate to contact us.
Traditional IRA: Non-spouse inherits
- If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA and are an Eligible Designated Beneficiary (other than a spouse) you have several withdrawal options.
If the account holder died before their required beginning date to start taking Required Minimum Distributions (RMDs), these are your choices:
Option #1: Open an Inherited IRA: Life expectancy method
Account type | You transfer the assets into an Inherited IRA held in your name. |
Money is available | RMDs must begin no later than December 31 of the year after death. |
Other considerations: | Your annual distributions are spread over your single life expectancy, which is determined by your age in the calendar year following the year of death and reevaluated each year. Note: If the Eligible designated Beneficiary is the minor child of the deceased account holder, the life expectancy method of distribution is no longer available when the child turns age 21. At that point, the distribution option is required to switch to the 10-year method below and all remaining assets need to be distributed by the end of the 10th year after the minor turns age 21. If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary. Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution. You will not incur the 10% early withdrawal penalty. Undistributed assets can continue growing tax-deferred. You may designate your own IRA beneficiary. |
Option #2: Open an Inherited IRA: 10-year method
Account type | The assets are transferred into an Inherited IRA held in your name. |
Money is available | At any time up until 12/31 of the tenth year after the year in which the account holder died, at which point all assets need to be fully distributed. |
Other considerations: | You are taxed on each distribution. You will not incur the 10% early withdrawal penalty. Undistributed assets can continue growing tax-deferred for up to ten years. You may designate your own IRA beneficiary. |
Option #3: Lump sum distribution
Account type | None. All assets in the Inherited IRA are distributed to you. |
Money is available | All at once. |
Other considerations: | You will not incur the 10% early withdrawal penalty. You may move to a higher tax bracket depending on the amount of the distribution and your current income level. |
Account holder over 72
If the account holder died after their required beginning date to start taking Required Minimum Distributions (RMDs), these are your choices:
Option #1: Open an Inherited IRA: Life expectancy method
Account type | You transfer the assets into an Inherited IRA held in your name. |
Money is available | RMDs must start by December 31 of the year after death. Note: If the original account holder did not take an RMD in the year of death, an RMD must be taken from the account by 12/31 of the year the original account holder died. |
Other considerations: | Your annual distributions are spread over your single life expectancy (determined by your age in the calendar year following the year of death and reevaluated each year) or the deceased account holder’s remaining life expectancy, whichever is longer. Note: If the Eligible designated Beneficiary is the minor child of the deceased account holder, the life expectancy method of distribution is no longer available when the child turns age 21. At that point, the distribution option is required to switch to the 10-year method below and all remaining assets need to be distributed by the end of the 10th year after the minor turns age 21. If there are multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary. Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution. You will not incur the 10% early withdrawal penalty. Undistributed assets can continue growing tax-deferred. You may designate your own beneficiary. |
Option #2: Lump sum distribution
Account type | None. All assets in the IRA are distributed to you. |
Money is available | All at once. |
Other considerations: | You will pay income taxes on the distribution all at once. You will not incur the 10% early withdrawal penalty. You may move to a higher tax bracket depending on the amount of the distribution and your current income level. |