Monday, November 15, 1999
ASK THE MONEY PANEL
Unspent IRA can be handed down to heirs
Question: If a nonspousal beneficiary started receiving distributions from an IRA and the beneficiary dies before the funds are entirely distributed, how are the funds then distributed? What are the mechanics of how an IRA is bequeathed? — M.S., Springfield Township
Answer: Charlotte Dougherty, certified financial planner with Dougherty & Associates in Kenwood, says that the beneficiary of an inherited IRA is able to name a beneficiary to receive continuing payments.
The payments or distributions may not be changed once they begin, except that additional withdrawals can always be taken — and taxed. Simply furnish the inherited IRA custodian with your beneficiary information. Inherited IRAs (those inherited by nonspousal beneficiaries) can also be transferred to another IRA custodian and may even be transferred and split, if there is more than one beneficiary.
IRA beneficiary designations are important in determining amounts required to be taken as of the required beginning date (RBD) and what options are available in how to receive IRA proceeds at death. Consider: An IRA owner names his estate as beneficiary and chooses the recalculation method to determine his required minimum distribution (RMD). In the calendar year following his death, the entire balance of this IRA must be distributed and taxed in this single year because he had no “designated beneficiary” as defined by the IRS and, with the recalculation method, his life expectancy is reduced to zero. Even though his will might name beneficiaries, the IRA beneficiary designation to the estate rules out a more favorable tax result.
It is important to name primary and contingent beneficiaries for IRA accounts, and to review these designations periodically to be certain they reflect your intentions. Spouses have special status as beneficiaries and can make “fresh start” rollovers to their own IRAs. Even after the IRA owner has begun RMDs, the spouse as designated primary beneficiary can, at the owner's death, do a tax-free rollover of the IRA to her name. If she has not yet reached her RBD (the April following age 701/2), then she can postpone taking further distributions until she reaches her RBD. She can also name the children as beneficiaries. At her death, the child inherits this IRA and, if a timely election is made, can either take the lump sum, a distribution over five years or a life expectancy distribution. The latter will further extend the life of the IRA.
— Compiled by Amy Higgins
Readers should consider the Money Panel advice as general information only. Investors should seek the help of professionals on questions regarding their own portfolios because circumstances might vary.
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