Distribution Rules, Alternatives And Taxation - Beneficiary Considerations or Stretch IRAs

Beneficiary Considerations or Stretch IRAs

Beneficiary designations, with respect to both qualified and nonqualified retirement accounts, are an important consideration. Upon the death of a plan participant, a retirement plan beneficiary may be able to stretch out distributions and thus make smaller tax payments, but this may be done only in very specific circumstances.

  • Stretch IRA - Retirement plan assets passed on to a beneficiary and rolled over into an IRA, and distributed over the course of the beneficiary's life expectancy.

In general, IRS regulations favor spousal beneficiaries over non-spousal beneficiaries, when it comes to tax treatment of inherited retirement plan assets. The tax treatment also differs according to whether the plan participant's death is before or after the required beginning date for RMDs.

Death before Required Beginning Date
Spouse as Sole Primary Beneficiary - A spouse who is the sole primary beneficiary of the retirement account, may distribute the assets gradually over their life expectancy, or fully by December 31 of the fifth year following the year the participant dies. If the spouse elects to distribute the assets over their life expectancy, they are required to begin receiving post-death distributions either the year following the death of the participant or the year the participant would have reached age 70.5 - whichever year is later.

Non-spousal Beneficiary or Spouse Who is One of Multiple Beneficiaries
A non-spouse beneficiary or a spouse who is one of multiple beneficiaries, may distribute the assets over the life expectancy of the oldest beneficiary or distribute the full balance by December 31 of the fifth year following the year the participant dies.

Non-Spouse Non-Person Beneficiary
An individual may choose to designate a non-person, such as the individual's estate or a charity, as the beneficiary of their retirement account. In this case, the non-person beneficiary must distribute the full balance by December 31 of the fifth year following the year the participant dies.

  • Death after Required Beginning Date

    Spouse as Sole Primary Beneficiary
    The spouse beneficiary is required to distribute the assets over either the life expectancy of the spouse or the remaining life expectancy of the deceased, whichever is longer. If the funds are distributed over the life expectancy of the spouse, their life expectancy is re-determined each year. If the funds are distributed over the remaining life expectancy of the deceased, the life-expectancy number is fixed in the year of death and then reduced by one in each subsequent year.

    Non-Spouse Person Beneficiary and/or Spouse among Multiple Beneficiaries
    A non-spouse beneficiary or multiple beneficiaries would be required to distribute the assets over either the remaining life expectancy of the deceased or the life expectancy of the oldest beneficiary, whichever is longer. If the remaining life expectancy of the deceased is used, it is determined in the year in which the participant dies and then one is subtracted each subsequent year. If the life expectancy of the beneficiary is used, then it is determined in the year after the participant dies and one is subtracted each subsequent year.

Non-Spouse Non-Person Beneficiary
If the beneficiary is a non-person, the assets may be distributed over the remaining life expectancy of the deceased, which is determined in the year in which the participant dies and then reduced by one each subsequent year.


In all three cases, distributions must begin by December 31 of the year following the year the participant dies.

Rollover by Surviving Spouse – A surviving spouse may be able to rollover, tax free, all or part of a distribution from a qualified plan. The rollover rules apply as if the surviving spouse were the employee. The rollover may be into another qualified plan or a traditional IRA.

Rollovers by a Non-spouse Beneficiary – Before 2007, a distribution paid to a non-spousal beneficiary was not eligible for a tax-free rollover. Now, a non-spousal designated beneficiary may be eligible for a direct trustee-to-trustee transfer to an IRA set up to receive the distribution. The receiving plan will be treated as an inherited IRA.

Qualified Domestic Relations Order
Related Articles
  1. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  2. Products and Investments

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  3. Professionals

    A Day In The Life Of A Public Accountant

    Here's an inside look at the workdays of two experienced CPAs, to give you an idea of what it might be like to pursue a career as a public accountant.
  4. Professionals

    A Day in the Life of a Public Accountant

    There’s no typical day in the life of a public accountant, but one accountant’s experience may shed some light on what the career entails.
  5. Saving and Spending

    A Key Tip for Making Your Nest Egg Last Longer

    Retirees who don't want to deplete their nest eggs during a bear market should make sure to do the following.
  6. Mutual Funds & ETFs

    Fidelity Target Risk Funds Overview

    Get a brief overview of Fidelity's seven target risk funds, with a description of each fund's asset allocation and expense ratio.
  7. Investing News

    Is it the Right Time to Raise Interest Rates?

    Warning signs have started to emerge that point to a potentially dismal 2016 for the U.S. economy.
  8. Markets

    Four Big Risks of Algorithmic High-Frequency Trading

    Algorithmic HFT has a number of risks, and it also can amplify systemic risk because of its propensity to intensify market volatility.
  9. Mutual Funds & ETFs

    The Top 3 Invesco Funds for Retirement Diversification in 2016

    Explore analyses of the top three Invesco mutual funds for retirement diversification in 2016, and learn about the characteristics of these target-date funds.
  10. Investing Basics

    Hedging Risk for Beginners: How and When to Do It

    Hedging risk is always a good idea. Here is how sophisticated investors go about it.
RELATED TERMS
  1. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  2. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  3. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  4. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  5. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  6. Gross Exposure

    The absolute level of a fund's investments.
RELATED FAQS
  1. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Full Answer >>
  2. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  3. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  4. Why are mutual funds subject to market risk?

    Like all securities, mutual funds are subject to market, or systematic, risk. This is because there is no way to predict ... Read Full Answer >>
  5. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  6. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
Hot Definitions
  1. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  2. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  3. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  4. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  5. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center