If you’ve recently inherited retirement plan assets, you may be confused about your options. Can you distribute the funds? What about rolling them over to your own individual retirement account (IRA)? In fact, the situation is complicated, because the distribution options available to a retirement plan beneficiary are determined by several factors.
These include whether the retirement account owner (referred to hereafter as “participant”) dies before the required beginning date (RBD), whether the beneficiary is the spouse of the deceased, and the age of the beneficiary in relation to the age of the deceased at the time of death. Read on for an in-depth look at how inherited retirement plan assets are distributed.
Key Takeaways
- If you inherit a loved one’s retirement account, you may be required to take payments from it, depending on the required beginning date (RBD) and who the beneficiary on the account was.
- If a spouse is the sole beneficiary of a retirement account, one set of distribution rules apply.
- If a spouse is among other beneficiaries—or if no beneficiary is a spouse—then different rules apply.
- If the beneficiary is a nonperson, such an estate or a charity, yet other rules apply.
Death Before the Required Beginning Date
If the participant dies before the plan’s RBD—the date at which they would have been mandated to start taking distributions from the account—the options available to the beneficiary depend on who the beneficiary is and whether they are the sole beneficiary or one of several beneficiaries.
Spouse as Sole Primary Beneficiary
A spouse who is the sole primary beneficiary of the retirement account can choose to distribute a large sum or even the balance of the IRA, or can just take the required minimum distribution over their life expectancy. If the spouse elects to distribute the assets over their life expectancy, said spouse is required to begin receiving post-death distributions either the year following the year the participant dies or the year the participant would have reached age 72, whichever year was later.
Previously, the Required Minimum Distribution (RMD) age for IRA distributions was 70½, but following the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019, the RMD age was boosted to 72.
For the purposes of calculating post-death required minimum distributions (RMDs), the spouse’s life expectancy is determined by using the Single Life Expectancy Table found in Appendix B of IRS Publication 590-B (a copy of which can be downloaded from the IRS website). This table must be referred to for each year the spouse needs to calculate the post-death RMD. For instance, if the spouse is required to begin distributions in 2022, they will consult the table to determine the life expectancy period for 2022. In 2023, they must use the table to determine the life expectancy for 2023.
The spouse can also roll it over into an existing IRA.
Non-Spouse Person and/or Spouse Among Multiple Beneficiaries
Previously, a non-spouse human beneficiary could distribute the assets over the life expectancy of the oldest beneficiary. But following the passage of the SECURE Act, all assets must be distributed within 10 years for non-spouse beneficiaries.
Spouses are an exception to the 10-year rule, as are people with disabilities, and minor children; however, minor children are subject to the 10-year rule once they reach majority age.
Nonperson Beneficiary
An individual may choose to designate a nonperson, such as the individual’s estate or a charity, as the beneficiary of the retirement account. In this case, the nonperson beneficiary must distribute the full balance by December 31 of the fifth year following the year the participant dies.
Whether the person bequeathing the retirement account died before or after the required beginning date for distributions affects the options available to beneficiaries.
Death After the Required Beginning Date
If the participant dies after the RBD, these are the options available to the different types of beneficiaries.
Spouse as Sole Primary Beneficiary
The spouse beneficiary is required to distribute the assets over either the life expectancy of the spouse or the remaining life expectancy of the deceased, whichever is longer. If the funds are distributed over the life expectancy of the spouse, their life expectancy is recalculated each year. If the funds are distributed over the remaining life expectancy of the deceased, the life expectancy number is fixed in the year of death and then reduced by one in each subsequent year.
For example, let’s assume that a participant died at age 80, and the spouse beneficiary is 75 years old the following year. According to the Single Life Expectancy Table, the participant’s life expectancy would be 10.2, and the beneficiary’s life expectancy would be 13.4. The spouse beneficiary would use 13.4, which is the longer of the two life expectancies.
If the ages were reversed, and the longer of the two life expectancies was that of the deceased, the spouse would subtract one each subsequent year to determine the applicable life expectancy.
Non-Spouse Person and/or Spouse Among Multiple Beneficiaries
A non-spouse beneficiary or multiple beneficiaries would be required to distribute the assets over the 10-year period following the original IRA holder’s death. Before the passage of the SECURE Act, the distributions could be spread out over the lifetime of the non-spouse person.
Nonperson Beneficiary
If the beneficiary is a nonperson, the assets must be distributed over the next 10 years.
Roth IRA Beneficiary Options
RMD rules do not apply to the owner of a Roth IRA, and so there is no RBD for a Roth IRA. However, the post-death RMD rules (beneficiary options) do apply to those inheriting a Roth IRA. The options for Roth IRA beneficiaries are the same as those that apply to traditional IRA beneficiaries if the owner dies before the RBD.
A Plan Can Have Its Own Distribution Provisions
It is important to note that retirement plans are not required to allow the options provided in the RMD regulations. For instance, as discussed above, RMD regulations provide that a non-spouse beneficiary of a participant who dies before the RBD may distribute the assets over the beneficiary’s life expectancy or within five years after the participant dies.
Despite these provisions, an IRA agreement or qualified plan may require the beneficiary to distribute the assets in a much shorter period—for instance, immediately after the participant dies. If you inherit retirement assets, be sure to check with your plan provider about your available options.