Inheriting a Retirement Plan: Death Before the RBD

A retirement plan may be passed on to a beneficiary if the deceased passes away. This can occur before the deceased met the required beginning date (RBD) on distributions or after. The way the account is distributed will depend on when the deceased passed away - i.e. before or after the RBD - and the relationship the beneficiary has to the deceased. 

Surviving Spouse if Death Occurs Before the RBD

The spouse of an individual who passed away before the RBD on his or her retirement account has three options to receive distributions.

  1. The spouse may choose to receive the distributions in full over a five-year period beginning the year after the death of the deceased. The account must be fully distributed within five years to avoid penalty.
  2. The spouse may choose to receive payments over his or her life expectancy. Life expectancy, in this case, is determined by a table the IRS developed and uses. The spouse will receive gradual payments either the year after the individual account holder died or the year when the account holder would have turned 70.5, whichever is later.
  3. The spouse may choose to transfer the account into his or her own IRA. This option will result in unique requirements depending on the type of IRA account the individual has and the age of the individual.

Non-Spouse Beneficiary if Death Occurs Before RBD

If the individual beneficiary is not a spouse or if the spouse is one of many beneficiaries, the options will be different. In this case, the individual must choose to either receive payments in full within five years or gradual payments over a life expectancy. Life expectancy is calculated in the same manner. It is worth noting that, in both the single spouse beneficiary instance and this instance, the gradual life payment option is the default. As a result, a beneficiary must specifically elect the alternative 5-year payment plan and begin elections immediately on the required date if he or she chooses this route. 

Non-Person Beneficiary

At times, an individual may list a trust, charity or other organization as the beneficiary on a retirement account. In this case, the non person entity must elect the payment in full within 5 years. If the full balance of the account is not distributed by December 31 on the fifth year, the non person will be subject to penalties in the same manner as anyone electing this option but failing to meet this requirement.

What is the Best Option?

There is no essential tax difference between the multiple elections. However, for your personal purposes, one option may be more financially viable and subject to a lower tax bracket. You should elect the option that provides you with the greatest chance of net gain over time. For many individuals, this opportunity is best preserved by receiving the funds in full within five years so they can be re-invested according to your personal investment strategies. All inherited income on a traditional IRA is taxed, however, and you must be prepared for this reality whenever you plan on receiving distributions. 

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