CFP

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.




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