By: Robert Gordon, MBA, CFP®, AIFA®
Did you inherit an IRA or other retirement account in 2010? There are a number of requirements and deadlines you MUST be aware of. Failure to meet these deadlines could throw a wrench into your family’s financial planning for the future.
You have until September 30, 2011 to review and remove beneficiaries and you have until December 31, 2011 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 (RBD) and one of the beneficiaries is a nonperson, such as a charity or estate, the assets must be distributed by the end of the 5th 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 parent in 2010, to be shared equally. Assuming a 4% rate of return and distributions of no more or less than the required minimum distribution (RMD) amounts, the distributions to each would be as follows if they did not segregate the IRA before the September 30, 2011 deadline:
If they segregate the IRA by the deadline then make the distributions Mario will receive the amounts indicated in the table above but Ana would receive a significantly greater amount as shown below:
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.
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 December 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, 2011.
- Mario performs a disclaimer of his share by September 30, 2011,
Suggested Action Plan
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 example 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.