September 30: A Key Date For Retirement Plan Beneficiaries
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.)
Tutorials: Complete Personal Income Tax Guide
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:
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:
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.
Tutorials: Complete Personal Income Tax Guide
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.
Illustrating the Rules
The following examples demonstrate the rules for the distribution options for multiple beneficiaries:
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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:
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:
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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:
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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:
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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.
by
Denise Appleby
Denise Appleby is founder and owner of Appleby Retirement Consulting,which provides technical consultation, content, coaching, writing, editing and training services on related topics.
With more than 14 years of experience in the IRA and defined-contribution plans fields, Appleby has held several senior retirement-plan related positions with Pershing LLC, which included vice president of plans products and services, retirement plans manager, trainer, training manager, compliance consultant, technical help desk manager and writer.
With more than 14 years of experience in the IRA and defined-contribution plans fields, Appleby has held several senior retirement-plan related positions with Pershing LLC, which included vice president of plans products and services, retirement plans manager, trainer, training manager, compliance consultant, technical help desk manager and writer.
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