Did you inherit an individual retirement account (IRA) or any other retirement account? There are a number of requirements and deadlines that you MUST be aware of. Failure to meet these deadlines could throw a wrench into your family's financial planning for the future.

TUTORIAL: Retirement Planning

You have until September 30 to review and remove beneficiaries, and you have until December 31 to divide the IRA to take full advantage of things like large age differences.

Distribution Rules for Multiple Beneficiaries
Generally, individuals who are one of multiple beneficiaries of a retirement account are required to distribute the account over the life expectancy of the oldest beneficiary. If the account owner died before the required beginning date and one of the beneficiaries is a nonperson, such as a charity or estate, the assets must be distributed by the end of the fifth year following the year in which the account owner died. This shortened distribution period can put younger beneficiaries at a disadvantage. Consider the following examples:

Example 1 – Beneficiaries with Significant Age Gaps
Mario (65 years old) and Ana (35 years old) are the adult children of a deceased IRA owner who was married twice (the IRA owner outlived both spouses). They inherited an IRA valued at $1 million from their parents in 2010, to be shared equally. Assuming a 4% rate of return and distributions of no more or less than the required minimum distribution amounts, the distributions to each would be as follows if they did not segregate the IRA before the September 30 deadline:

Distributions for Mario & Ana (each)
1 2011 66 20.2 $20,000 $24,752 $495,248
5 2015 70 16.2 $18,928 $29,210 $462,927
10 2020 75 11.2 $16,158 $36,066 $384,029
15 2025 80 6.2 $11,148 $44,951 $244,894
20 2030 85 1.2 $2,836 $59,086 $14,653
21 2031 86 0.2 $586 $14,653 $586
Total Distributions over life of IRA $783,920

If they segregate the IRA by the deadline then make the distributions, Mario will receive the amounts indicated in the table above. However, Ana would receive a significantly greater amount as shown below:

Distributions for Ana
1 2011 36 47.5 $20,000 $10,526 $509,474
10 2020 45 38.5 $23,262 $15,105 $589,705
20 2030 55 28.5 $25,791 $22,623 $647,932
30 2040 65 18.5 $25,205 $34,061 $621,279
40 2050 75 8.5 $17,684 $52,013 $407,780
48 2058 83 0.5 $1,658 $41,439 $1,658
Total Distributions over life of IRA $1,517,911

Detailed Calculation Available
If Ana segregates her share by the deadline, she will accumulate $733,991 more especially since her life expectancy is greater than that of Mario. (For more on planning your individual retirement account, read 11 Things You May Not Know About Your IRA.)

Example 2 – One Beneficiary Is a Nonperson
Assume the facts are the same as in example 1, except that instead of Mario the other beneficiary is a charity. In this case, Ana would be required to distribute her inherited IRA by Dec. 31, 2015.

Getting Around This Limitation
Ana can avoid being restricted to Mario's or the charity's distribution period if (in the applicable example):

  • Mario/the charity take a full distribution of his/its share by September 30.
  • Mario performs a disclaimer of his share by September 30.

The Bottom Line
It is a good idea to review your retirement accounts, inherited or otherwise, including annuities and insurance policies for allocations and beneficiaries annually. For cases that involve multiple beneficiaries, it is important to understand the importance of these deadlines, especially when one of the beneficiaries is a nonperson. As shown in the examples above, timely action can significantly benefit younger beneficiaries. IRAs are useful but complex tools for the accumulation and transference of wealth. Consult a competent professional for specific guidance in your situation.

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