When someone dies who named you as an IRA beneficiary, you are not required to withdraw the entire inheritance immediately. But, any distributions you do receive as a beneficiary of a traditional IRA count toward your taxable income in the year you take them. You’re entitled to defer taking distributions -- and thus incurring income tax – until the fifth year after the IRA owner’s death. At that time, withdrawal of the entire account is required. However, if you take distributions over your life expectancy, you can defer taxes even longer than five years. Following this rule requires initial distribution in the calendar year after the account owner’s death.
Locate Table I for “Single Life Expectancy” in Appendix C of IRS Publication 590.
Determine your life expectancy number on the table using your age on your birthday in the year after the account owner’s death.
Divide the value of the IRA on the last day of the previous year by the life expectancy number. This is the minimum required beneficiary distribution that incurs the least amount of taxable income.
- Reduce the life expectancy number by one for each subsequent year to calculate future minimum beneficiary distributions.
- Any non-deductible contributions an account owner had in an IRA remains as the tax basis after death. The percentage of distributions comprising the basis are not taxable to account owners or beneficiaries.
- Beneficiaries who are surviving spouses can treat inherited IRAs as their own accounts or roll over inherited IRAs to their own IRAs. These options can further defer taxable IRA distributions.
- Take withdrawals using the account owner’s number from the life expectancy table if it’s larger than your own number and the account owner had reached the age of required IRA distributions by the date of death. Find the number for life expectancy of the account owner using the age that person would have reached in the year after death.
Items you will need
- Internal Revenue Service Publication 590
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