As the beneficiary of an inherited IRA, you have a decision to make about how and when you will begin to take distributions:
- Do you need the assets now, or would you prefer to maintain the IRA’s tax-deferred status as long as possible?
- At some point will you need to generate retirement income from the inherited assets, or would you prefer to pass on all or a portion of the tax-deferred assets to your own beneficiaries?
Some factors that impact your options will be beyond your control, such as your relationship to the original account owner, whether or not he or she had begun to take required minimum distributions (RMDs), and if there are multiple account beneficiaries. Others, however, including your immediate and future cash flow needs, when you plan to retire, your long-term goals and other retirement income sources will help determine an optimal distribution strategy.
If you have immediate cash flow needs and wish to begin taking distributions from the inherited IRA, you can choose a lump sum distribution. If the original IRA owner died before their Required Beginning Date (April 1st of the year after he/she would have turned age 70½) you also have the option of using what the IRS terms the “five-year rule,” allowing you to take distributions in any amount at any time, as long as all the IRA assets are depleted by the end of the fifth year following the year of the account owner’s death.
It’s important to remember, however, that any distributions taken from an inherited IRA will be taxed. But there are also some strategies that will allow you to continue the tax-deferred growth of inherited IRA assets.
Extending tax-deferral for spousal beneficiaries
If you’re a surviving spouse and wish to extend the tax-deferral benefits of an inherited IRA, the common choice is to roll over the assets into your own IRA and begin taking distributions at age 70½ based on your life expectancy. If the original owner died before their Required Beginning Date (April 1st of the year after he/she would have turned 70½), you can also opt to transfer the assets into an inherited IRA and take distributions over your own single life expectancy. Or if the original account owner died on or after their Required Beginning Date, you can transfer the assets to an inherited IRA and take distributions over the longer of your or your deceased spouse’s life expectancy.
In the wake of the Supreme Court marriage equality ruling, these options now also apply to married same-sex couples, affording surviving spouses the planning flexibility to postpone distributions rather than having to begin taking them in the calendar year immediately following the year of death of the original IRA holder.
Extending tax-deferral for non-spousal beneficiary options
If you’re inheriting an IRA from someone other than a spouse, in order to continue tax-deferred growth of the assets, you will need to transfer them into an inherited IRA. If the original IRA owner died before their Required Beginning Date, you will need to take distributions starting at age 70½ based on your life expectancy. If the original IRA owner died on or after their Required Beginning Date, you have the choice to take distributions based on the longer projected life expectancy of you or the original account holder.
Any decisions related to the disposition of inherited IRA assets should involve an in-depth discussion with your SunTrust advisor who can help you evaluate your cash flow and income needs, taxable and tax-deferred accounts, and determine the best strategy to employ.