Options For Others

Clients who inherit IRA assets from someone other than their spouse can still keep IRA inheritances growing tax-deferred by utilizing one of two options.

The first option is to create a BDA. This gives clients the ability to control how assets are invested and who will inherit the assets when they die. There is no way to delay minimum required distributions, however. MRDs must begin by December 31 of the year following the IRA owner's death and will generally be based on the spouse's life expectancy.

Another option for clients who don't need the assets from an IRA inherited from a nonspouse: Disclaim all or part of the inheritance within nine months of the IRA owner's death. The disclaimed assets would then pass to the next eligible beneficiaries.

Considerations For Advisors

While Roth IRAs are delightful, tax-free retirement accounts for the Roth owner, they can be less beneficial from a tax-deferred perspective for the inheritor simply because the IRS is determined to see that the money is distributed and is not passed on to more than one set of beneficiaries tax-free. As a result, both spouses and others who inherit a Roth and transfer the funds to a BDA must begin taking minimum required distributions by December 31 of the year following the IRA owner's death. The good news for those inheritors who are younger than 59 1/2 and want to tap some of the funds-they can be withdrawn tax-free forever, provided the assets had been in the account for five years or more.

Deadlines are also a crucial element when it comes to assisting clients who have inherited IRAs. Usually the deadline for beginning MRDs from an inherited IRA beneficiary distribution account is December 31 of the year following the IRA owner's death. If a client misses that deadline and the deceased IRA owner had not yet reached age 70 1/2, the client will pay an additional 50% tax on missed MRDs. Is there any way to get out from under the 50% tax? Thankfully, the answer is yes for both spouses and others who inherit IRAs. "You can ensure that the MRD penalties are waived if you take advantage of the IRS's five-year rule," says Miller.

To use the five-year rule, clients must withdraw all assets from the inherited IRA by December 31 of the fifth year following the IRA owner's death. The five-year rule also allows inheritors to withdraw any assets they want from the IRA at any time in any amount as long as it's depleted within the five-year timeframe.

This five-year schedule might work well for clients who aren't 59 1/2 and want to accelerate distributions. But keep the deadline for taking minimum required distributions in mind for everyone else. A five-year distribution schedule will be a tax and estate planning nightmare for those who want to stretch out the life of their IRA for the benefit of heirs.

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