Avoiding Non-Spouse Beneficiary Mistakes in 5 Easy Steps

Avoiding Non-Spouse Beneficiary Mistakes in 5 Easy Steps

| December 10, 2020
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How can I avoid making costly mistakes when I inherit an IRA from a person who was not
my spouse? Inheriting an IRA can be a financial windfall, but it’s important to understand the complex,
specific rules that apply to non-spouse IRA beneficiaries to avoid critical errors.

1.  At first, don’t do anything! Especially, don’t take a distribution from the IRA. Doing so
without proper planning may forfeit years of potential tax-favored investment returns. Inherited
IRA funds are distinct from IRA funds you save for yourself. They can’t be commingled with
your other IRAs, you can’t make contributions to an account that holds them, and they can’t
be converted to inherited Roth IRAs. Before acting, consult with a qualified advisor to learn
the rules and plan how to best use the inherited funds in your personal situation.

2.  Transfer inherited funds from the deceased owner’s IRA into your own new
“inherited IRA.” This allows you to move the funds to a financial institution you prefer.
The transfer between institutions must be made directly, trustee-to-trustee (non-spouse
beneficiaries can’t use 60-day rollovers).

3.  If the original IRA has multiple beneficiaries, split it so each obtains a separate
inherited IRA. Splitting the IRA is vital if you are a minor child, chronically ill or disabled
(under IRS definitions), or no more than 10 years younger than the owner. That way, you can
preserve the ability to stretch distributions over your life expectancy. Even if you do not fit
within one of these categories, splitting the accounts is important for practical reasons so that
you and the other beneficiaries will have your own inherited account.

4. Take distributions as required. In most cases, you will have to receive the entire account
by December 31 of the tenth year following the owner’s death, but you will not have to take
annual required minimum distributions. If you are a minor child, chronically ill, disabled, or no
more than 10 years younger than the owner, you can stretch distributions from the inherited
IRA over your life expectancy. A minor child can only use the stretch until the age of majority
(age 18 in most states) or until age 26 if still in school.

5.  Heed deadlines and records. Inherited IRAs must be established and split by December
31 of the year after that of the owner’s death. Also, check the records of the deceased IRA
owner to see if an inherited Traditional IRA contained non-deducted contributions, which
provide tax-free distributions. And be sure to designate beneficiaries of your own to the
inherited IRA that you establish.

Copyright 2020 Ed Slott and Company LLC.  Reprinted with permission. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

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