September 30: A Key Date For Retirement Plan Beneficiaries

By Denise Appleby AAA

If you recently inherited, or expect to inherit, retirement plan assets, you should keep September 30 in mind. It's a very important date when it comes to retirement accounts with multiple beneficiaries. This is because IRS regulations on required minimum distributions state that for accounts with multiple beneficiaries, each beneficiary is allowed to use his or her own life expectancy for calculating post-death distributions, if the beneficiaries take certain actions by September 30 of the year following the year the retirement-account owner dies. If this applies to you, read on to find out how these rules work and how they might be applied to your situation. (For background reading, check out Strategic Ways To Distribute Your RMD.)

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Determining the Designated Beneficiary
Generally, if there is more than one designated beneficiary for a retirement account, the life expectancy of the oldest beneficiary is used to determine post-death distributions. This can be disadvantageous for an individual who is significantly younger than the other beneficiaries, or for an individual who is one of multiple beneficiaries, with the other beneficiaries being entities, such as charities. This disadvantage can be circumvented if, before September 30 of the year following the death of the retirement-account owner, the older and/or non-person beneficiaries take one of the following actions:

  • Take a full distribution of their portion of the inherited assets.
  • Properly disclaim their portion of the inherited assets.

Note: A disclaimer of inherited assets must meet certain federal and state requirements. For more information on disclaimers, refer to Disclaiming Inherited Retirement Assets.

The beneficiaries that remain after this September 30 deadline are the only ones taken into consideration when determining which beneficiary's life expectancy can be used to calculate post-death beneficiary distributions.

Illustrating the Rules
The following examples demonstrate the rules for the distribution options for multiple beneficiaries:

Example 1 - Two Beneficiaries, One a Charity

John died this year at age 65, and the beneficiaries of his IRA - which is valued at $1 million - are his favorite charity and his 45-year-old son, Tim. Tim and the charity were each designated to receive 50% of the IRA. Because John died before the required beginning date (RBD) and one of his beneficiaries is a non-person (the charity), the $1 million must be fully distributed by December 31 of the fifth year following the year John died.
Had Tim been the only beneficiary of the IRA, he would have been allowed to do one of the following:

  • Distribute the amount within the five-year period stated above.
  • Stretch distributions over his life expectancy. Since Tim reaches age 46 next year, his life expectancy is 37.9 years. (Refer to the IRS "Single Life Expectancy Table" in IRS Publication 590.)

But all is not lost for Tim. He may still be able to use his life expectancy if the charity does either of the following:

  • Takes a full distribution of its half by September 30 of next year
  • Properly disclaims its half by September 30 of next year.

Tim may ask the charity to take either of these actions, so that he is allowed to benefit from using his life expectancy.

Example 2 - Account Holder Dies After RBD

The facts are the same as in Example 1 except that John dies at age 74. Because John died after the RBD and one of his primary beneficiaries is a non-person, post-death distributions must be taken over John\'s remaining life expectancy. These distributions must begin next year, at which time John\'s remaining life expectancy is 13.4 years. However, Tim is allowed to take distributions over his life expectancy of 37.9 years if the charity takes either of the following actions:

  • Takes a full distribution of its half by September 30 of next year.
  • Properly disclaims its half by September 30 of next year.
Example 3 - Four Family Members as Beneficiaries

Jake died this year at age 75, leaving his three children and his spouse, Mary, as his IRA beneficiaries. The ages of the children next year are 30, 32 and 36. Mary\'s age next year is 60. Each beneficiary must receive distributions over Mary\'s life expectancy of 25.2 years. However, the 30-year old child may use his or her life expectancy of 53.3 years to calculate post-death distributions if Mary and the older children do either of the following:

  • Take a full distribution of their portions by September 30 of next year
  • Properly disclaim their portions by September 30 of next year.

If, however, no action is taken by September 30, each beneficiary may use his or her own life expectancy if each of their portions is allocated to separated accounts by December 31 of next year.


The Bottom Line
If you are one of multiple beneficiaries, be sure to take the necessary steps to secure available distribution options. If your distributions depend on what the other beneficiaries do by the September 30 deadline, be aware that these other beneficiaries may not be willing to take a full distribution of their amounts, because it may mean paying taxes on the amount for the year the distribution occurs. On the other hand, if their portions are insignificant amounts or they are charities of non-profit organizations that do not pay income tax, they may be accommodating. Alternatively, where multiple individuals are beneficiaries, each beneficiary can transfer his or her amount into separate accounts by December 31 of the year following the year in which the owner dies, thereby allowing each beneficiary to use his or her own life expectancy.

Finally, be sure to consult with a competent tax professional before you make any decisions about your retirement assets, including those you inherit.

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