Options for a Non-Spousal Beneficiary of an IRA

While the surviving spouse inheriting an Individual Retirement Account (IRA) has multiple options, the choices allowed a non-spousal IRA beneficiary by the Internal Revenue Service are more limited. Also known as a beneficiary IRA, some options depend on the decedent's age and whether he was already taking required minimum distributions from the account.

Prohibitions

Unlike with an IRA inherited by a spouse, a non-spousal beneficiary cannot treat the IRA as his own, roll it over into his own IRA account or make a charitable distribution. While the spousal beneficiary has all of these options, she may also use any of the options available to a non-spousal beneficiary when deciding what to do with her deceased spouse's IRA. Non-spousal beneficiaries cannot make additional contributions to the account.

Important Dates

Non-spousal IRA beneficiaries must make a decision about the account within nine months of the decedent's death. If more one than one person is designated a beneficiary of the decedent's IRA, so the assets are shared, each beneficiary must set up an inherited IRA for his percentage of the assets by the last day of the year following the original account owner's death.

Required Minimum Distributions

If you inherit an IRA, you must usually take the IRS required minimum distributions from the account based on either your or the late owner's life expectancy. The IRS provides this information under its single life expectancy table. One option for a non-spousal beneficiary is to make a trustee-to-trustee transfer. Under this transfer, the inherited assets are held in the name of the deceased for your benefit as the individual named as beneficiary. Using this option means you must take required minimum distributions.

Five-Year Rule

If the beneficiary decides to cash out the IRA and the decedent was not yet aged 70 1/2, when mandatory traditional IRA distributions start, she may opt for the five-year rule. This regulation allows the inherited assets to be withdrawn in any amount before December 31 of the fifth anniversary year of the decedent's death. As long as all assets are withdrawn and the account closed within five years, the IRS waives the penalties for not taking required minimum distributions.

References

About the Author

A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including Sapling, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.