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The Survivor's OptionsFor IRA’s or pension plans where the owner’s death occurs before age 70 1/2 by Frank Armstrong Your first choice is to retain the IRA under the
owner’s name with yourself as beneficiary. The implication of that
choice is that any distributions required of the owner will now have
to be made as if the owner were still alive. So, mandatory
distributions must begin when the owner would have turned 70 ½.
Regardless of the age of the beneficiary, before the owner’s age 70
½, any distributions made to the beneficiary are not subject to the
10% penalty because distributions made due to death are exempt from
the penalty. So, if you, the beneficiary, need distributions before
your own age 59 ½, this selection might meet your needs. Alternatively, if current income is not a
concern, and maximum deferral is an objective, you might convert the
IRA to your own. Now all distribution requirements are based on your
age. But, distributions made before age 59 ½ are subject to the 10%
penalty. If you are substantially younger than the owner, this path
would let you accumulate longer before being forced to make
distributions. However, the chance to take “early” distributions
is lost. There is a third choice: split the IRA into two
parts. Determine how much money you will need to fund expected
withdrawals before age 59 ½ and keep that amount in the beneficiary
IRA. The rest can be shifted to an IRA that you own to support you in
later life. To accomplish any of the above choices, you must
make a positive election by the December 31st of the year
following death of the owner. Otherwise, the general rule is that all
funds must be distributed to the beneficiary by the end of the fifth
year following death. Failure to make the election in a timely manner
could be a disaster if the sums involved are significant. It’s important to be aware that a distribution
from the Beneficiary IRA may be interpreted as an election to keep the
entire IRA as a beneficiary IRA. So, if you want to convert all or
part to your own IRA, you should do so before beginning distributions
from the Beneficiary IRA. However you decide to use your inherited IRA,
document your choices so there won’t be any dispute later with the
IRS. A registered letter explaining your decision to the custodian
would be a good place to start. Of course, make sure that your own beneficiary
selection is up to date so that your heirs will get the maximum
possible benefit that they might be entitled to. And, it’s more than
likely that investment choices made by the owner will need to be
revised to meet the beneficiary’s objectives and situation. So, a
complete review of investment strategy might be in order. Frank Armstrong, CFP, is the author of Investment
Strategies for the 21st Century, published here,
President of Investor
Solutions, Inc., a fee-only Registered Investment Advisor,
and Chief Investment Strategist of DirectAdvice.com. Note: The
featured writer is solely responsible for the content of this article.
The opinions expressed herein are not necessarily those of MFI or BES,
Inc. Get The Facts:
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If
you have just inherited an IRA, or pension plan that you can rollover
into an IRA, you will need to make some critical choices. The
“kinder, gentler” IRS gives you some time to decide, but they are
still fairly unforgiving of errors. The stakes can be large, so
let’s look at some of the options. We assume here that the owner had
not reached age 70 ½ (The Required Beginning Date) by the time of
his/her death.
