9 Questions on IRA Transfers and Beneficiary Distribution Accounts
For beneficiaries who inherit IRA assets, there are a variety of options available for transferring funds from a deceased individual’s account. Unfortunately, having too many choices can complicate an already difficult situation. But what if you could help ensure a smooth and less stressful transition for your clients? By understanding the intricacies of the transfer process and the rules involved, you can do just that.
With this in mind, here are nine questions (and answers) to help you and your clients better understand IRA transfers and beneficiary distribution accounts (IRA-BDAs).
Nonspouse beneficiaries. A nonspouse beneficiary must move the funds into an IRA-BDA in his or her name and take life expectancy payments accordingly.
Spousal beneficiaries. A spousal beneficiary has two options:
- Treat the funds as his or her own and move the funds into an IRA in his or her own name
- Choose to be treated as the beneficiary and move the funds into a spousal IRA-BDA in his or her name and take life expectancy payments accordingly
Nonspouse IRA-BDAs. The first RMD must be taken by December 31 of the year following the decedent’s death.
Spousal IRA-BDAs. If the surviving spouse is the sole beneficiary and the decedent died before reaching his or her required beginning date (RBD) (April 1 of the year following the year in which he or she turned 70½), the spousal beneficiary may defer RMDs until December 31 of the year in which the decedent would have turned 70½ or December 31 of the year following the decedent’s death, whichever comes later.
If the spouse treats the funds as his or her own and moves the funds to his or her own IRA:
- The standard RMD rules apply.
- RMDs must begin by the spouse’s RBD (as explained above).
Some scenarios may allow beneficiaries of IRA owners who died prior to reaching their RBD to not start RMDs by the required dates (detailed above) as long as the IRA-BDA is fully distributed by December 31 of the year containing the fifth anniversary of the decedent’s death.
As the beneficiary, your client must satisfy all outstanding RMD amounts for the decedent, taken from the account opened by the beneficiary, by December 31 of the year the decedent passed away.
If there’s no designated primary or contingent beneficiary, the IRA type determines who receives the assets. Each IRA custodian has its own default beneficiary provisions.
At National Financial Services (the custodian here at Commonwealth), the following rules apply:
- Traditional, Roth, SIMPLE, and SEP IRAs: The beneficiary is the account owner’s surviving spouse. If there is no surviving spouse, the beneficiary is the account owner’s estate.
- IRA-BDAs: The spouse of the IRA-BDA owner is not entitled to the assets unless designated as a beneficiary. If the IRA-BDA owner dies without naming a beneficiary, the decedent’s estate is automatically entitled to the assets. Spouse beneficiaries of IRA-BDAs cannot treat the funds as their own and move the funds into their own IRA. Beneficiaries must move the funds to their own IRA-BDAs and take life expectancy payments accordingly.
- Minor-owned IRAs: The beneficiary is the minor’s estate or is otherwise determined in accordance with the applicable state’s Uniform Gifts to Minors Act or Uniform Transfers to Minors Act. The custodian is not permitted to designate a beneficiary.