When the owner of an IRA dies, there are a number of factors involved when determining the distributions (if any) that a beneficiary must take. Taxes are inevitable, but there are ways to minimize them. The rules can be complicated so always make sure to consult with a financial planner.
Required Beginning Date
Whether the owner died before or after the required beginning date (April 1st following the year they turned 70 ½) will be a factor in determining when distributions must be taken.
Spouse as Beneficiary
There are 3 types of beneficiaries: spousal, non-spousal and a non Individual (i.e. a trust). A spouse as beneficiary has more freedoms than a non-spousal beneficiary, and can elect to become owner of the new IRA, in which case no minimum distribution is required. If the spouse elects to be the beneficiary, a minimum distribution will be required.
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Non Spousal Beneficiary
Non-spousal beneficiaries can either take a minimum yearly distribution (calculated via a table) before December 31st of the following year or they can withdraw the entire balance within 5 years of death. In either case, income taxes are due at withdrawal.
Required Minimum Distribution
To determine the required minimum distribution, beneficiaries select from one of 3 tables depending on when the owner died and the age and status of the beneficiary.
For 2009, an IRA beneficiary does not have to withdraw distributions.