In my last post, I outlined the key points to keep in mind when dealing with an inherited IRA. Unfortunately, the discussion may not end there. You may be the successor beneficiary of a previously inherited IRA.
In this situation, the IRA or other account was inherited by a prior beneficiary following the account owner’s death. Oftentimes the original account beneficiary will pass away before the IRA is completely liquidated. If that is the case, the successor beneficiary must know how the distribution rules will impact her.
The analysis begins by determining the date the original beneficiary inherited the IRA. (This is the date of the IRA account owner death.) Under current tax rules, if the IRA’s original beneficiary inherited the account on or before December 31, 2019, the distribution rules applicable to a successor beneficiary will differ from the rules that will apply if the original beneficiary inherited the IRA after December 31, 2019. Let’s look at each situation:
Did the original beneficiary inherit the IRA on or before December 31, 2019? If so, the successor beneficiary will have 10 calendar years following the year of the original beneficiary’s death to completely liquidate the IRA. This 10 year liquidation period will apply to any individual named a successor beneficiary. For instance, if the successor beneficiary is the original beneficiary’s spouse, he or she must liquidate the entire balance of the IRA with the 10 year term.
The successor beneficiary is not required to withdraw a minimum amount each year during the term. She may wait until the very end of the term to liquidate the IRA. The IRS will penalize her if she does not fully liquidate the account by the end of the 10 year term. The penalty will be equal to 50% of the balance remaining in the IRA at the end of the term. The IRS will levy the penalty each year until the IRA is liquidated.
Did the original beneficiary inherit the IRA after December 31, 2019? If the original IRA beneficiary inherited the account after December 31, 2019, the distribution rules applicable to the successor beneficiary will depend upon the status of the deceased original beneficiary at the time of his death. If the original beneficiary was an “eligible designated beneficiary,” or “EDB” (defined by the tax code), the successor beneficiary will have 10 years from the year of the original beneficiary’s death to liquidate the IRA.
An EDB may be: a) the surviving spouse or a minor child of the account owner: b) a disabled or chronically ill individual: or c) an individual not more than 10 years younger than the deceased account owner. The tax code deems all other individual beneficiaries to be “designated beneficiaries.” (A successor beneficiary will never be an EDB under the tax code.)
If the original IRA beneficiary was merely a designated beneficiary, then the successor beneficiary has only the remainder of the original beneficiary’s 10 year term to complete the IRA liquidation. She does not get a new 10 year term to liquidate the IRA.
Again, the required minimum distribution rules do not apply. However, the IRS will impose the 50% penalty if the account is not fully liquidated by the end of the original beneficiary’s 10 year term. A successor beneficiary will have to move quickly to liquidate the IRA if the original beneficiary died late in the last year of the 10 year term.
One must be on their tippy-toes in any situation involving an inherited IRA or other retirement account. She must be especially careful if inheriting a previously inherited IRA.
If you or someone you know is struggling to manage an inherited IRA or other retirement account, give me a call. I can help.