Deadlines You Must Meet If You Inherit A Retirement Account

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by Rob Gordon

Did you inherit an individual retirement account (IRA) or any other retirement account? There are a number of requirements and deadlines that you MUST be aware of. Failure to meet these deadlines could throw a wrench into your family�s financial planning for the future.

TUTORIAL: Common IRA Rollover MistakesYou have until September 30 to review and remove beneficiaries, and you have until December 31 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 and one of the beneficiaries is a nonperson, such as a charity or estate, the assets must be distributed by the end of the fifth 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 parents in 2010, to be shared equally. Assuming a 4% rate of return and distributions of no more or less than the required minimum distribution amounts, the distributions to each would be as follows if they did not segregate the IRA before the September 30 deadline:

 

Distributions for Mario & Ana (each)
Elapsed Years	Calendar Year	Beneficiary Age	MD Factor	Interest Earned	Annual Distribution	Year-End Balance
1	2011	66	20.2	$20,000	$24,752	$495,248
5	2015	70	16.2	$18,928	$29,210	$462,927
10	2020	75	11.2	$16,158	$36,066	$384,029
15	2025	80	6.2	$11,148	$44,951	$244,894
20	2030	85	1.2	$2,836	$59,086	$14,653
21	2031	86	0.2	$586	$14,653	$586
Total Distributions over life of IRA					$783,920

 

If they segregate the IRA by the deadline then make the distributions, Mario will receive the amounts indicated in the table above. However, Ana would receive a significantly greater amount as shown below:

Distributions for Ana
Elapsed Years	Calendar Year	Beneficiary Age	MD Factor	Interest Earned	Annual Distribution	Year-End Balance
1	2011	36	47.5	$20,000	$10,526	$509,474
10	2020	45	38.5	$23,262	$15,105	$589,705
20	2030	55	28.5	$25,791	$22,623	$647,932
30	2040	65	18.5	$25,205	$34,061	$621,279
40	2050	75	8.5	$17,684	$52,013	$407,780
48	2058	83	0.5	$1,658	$41,439	$1,658
Total Distributions over life of IRA					$1,517,911