What are the rules if the beneficiary of an inherited IRA dies?

Q: I appreciate your columns in MarketWatch and thank you for writing them. I recently read one of your columns on IRA inheritance and it raised a question for our family. My uncle (age 71) recently passed away and left his IRA to my mother, his older sister. My question is what are the rules if the beneficiary of the inherited IRA dies?

– Fred

A.: Hello Fred, thanks. I’m glad you like them.

I’m sorry to hear about your uncle’s death. My condolences to you and your family.

First I’ll explain the rules, then I’ll address some strategic issues to discuss with your advisor.

Because your mother is older than your uncle, she is “not more than 10 years younger” than your uncle and is therefore an Eligible Designated Beneficiary (EDB) under one of the qualifications described in the SECURE Act. Since your uncle has not yet reached his required starting date (April 1st of the year after his 72nd birthday), your mother as an EDB has the option to operate under the new 10-year rule or she can “stretch” the payouts . based on their sole life expectancy.

If you choose to stretch, your mother would use her age on December 31st of the year following the year your uncle died and find the factor from the single deaths table on page 20 of this article Document from the Federal Register. She then divides the value of the account as of December 31st of the year your uncle died by that factor to determine the minimum distribution required. This distribution must be made by December 31 of the year following the year your uncle died.

Each subsequent year, she reduces the factor by 1, then takes the value of the account at the end of the previous year and divides by the new factor. If your starting age for this is 82 or older, the route will empty the IRA in less than 10 years.

For example, if she starts at age 86, the factor is 7.6 the first year, 6.6 the next, 5.6 the next, and so on. Well, if your mother’s starting age was say 62, the factor is 25.4, so the percentage of the account that has to come out each year is relatively small for younger beneficiaries.

If your mother dies, whoever she designated as her beneficiary in the inherited IRA is a ‘successive beneficiary’. Let’s say that’s you. As the successor beneficiary of an owner of an inherited IRA that used the route, you would be subject to the new 10-year rule and would have to have the account by the 10th year after the year your mother died. to empty. This also applies if you would otherwise qualify as an EDB.

On the other hand, if she opts for the 10-year rule, she is not required to distribute funds at any time, except that the account must be fully distributed by the end of the 10th year after the year your uncle died. If your mother dies, the descendants must ensure that the account is empty by the date your mother emptied the account.

So the rules offer very different possible cash flow patterns from the account. If she needs or wants to use the money for herself, she can take it under either option, and she can always take more than is needed in any given year. If she takes a distribution, she is taxable on that.

If she wants to minimize the tax bill that accompanies the distributions, the task of strategic tax planning here is to determine the likely cash flows one way or the other and overlay those cash flows with your respective tax rates.

If you anticipate that your mother’s tax rate will be much higher than yours, the method that spreads payments over the longest period of time may be the way to go since it minimizes the payouts to her. If your rate is likely to be higher, it may be better to get the money out quicker at their lower rates. It can be difficult because it can be unclear what your respective tax rates will be in the future and you don’t know when you or your mother will die. Nevertheless, the presentation of the possible cash flows can sometimes help with these decisions.

If you have a question for Dan, please email him with “MarketWatch Q&A” in the subject line.

Dan Moisand is a Financial Planner at Moisand Fitzgerald Tamayo Serving clients across the country from offices in Orlando, Melbourne and Tampa, Florida. His comments are for informational purposes only and do not replace personal advice. Let your advisor advise you on what is best for you. Some questions have been edited. What are the rules if the beneficiary of an inherited IRA dies?

Brian Lowry

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