Inherited Retirement Plan Deadlines to Know

When an individual dies with an active retirement plan in place, the beneficiaries on the retirement plan can begin receiving distributions. It is important to know that the rules for distribution will vary based on two primary factors: whether the individual died prior to the required minimum distribution period (RMD) and the relationship the beneficiary has to the individual account holder.

Death before or after RMD

If the individual dies before the RMD, the beneficiary may have an option either to receive payment in full within 5 years or opt for a lifetime gradual payment. The entire account must be distributed no later than December 31st of the fifth year following the account holder's death in the five-year payment plan. This option is available only to a spouse as sole beneficiary. If no election is made, the choice defaults to gradual payment. If the account holder was already receiving distributions upon death, then the only option available is a gradual distribution. From there, the way the distributions are made depends on whether there is a sole beneficiary or multiple beneficiaries. 

Determining a Beneficiary

A beneficiary on a retirement account must be determined by September 30 in the year following the year when the account holder passed away. At times, a beneficiary may have been listed on September 30 in the year of the account holder's death but not in the year following. This can occur due to death, divorce or changes in the account holder's elections. There can often be more than one beneficiary on a plan, and this means each beneficiary will have to be alert and aware for deadlines in elections in order to both receive distributions correctly and minimize tax obligation. 

Separate Accounting

Each beneficiary will be able to use his or her own life expectancy as the measure by which periodic payments are distributed. In order to gain this benefit, the beneficiaries must set up and elect separate accounts by December 31 in the year following the year of the account holder's death. Then, the account holder can begin estimating life expectancy based on IRS calculations in that year. This is the new law as of 2004. A previous version did not allow the individual to use his or her life expectancy in the first year. As a result, younger account holders were penalized. For any beneficiary other than a spouse, the main deadline to be aware of for setting up and electing this separate accounting is December 31.

Electing a Payment Option

For a spouse, there are several options if the account holder dies after the RMD. First, the spouse can elect to receive payments according to the remaining life expectancy of the deceased. This is calculated based on the life expectancy at the time of death minus 1 for each year thereafter. The spouse can also choose to use his or her own life expectancy to determine gradual payments. This election must be made by December 31 of the year following the year of the account holder's death. 

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