TODAY'S PAPER
59° Good Evening
59° Good Evening
LifestyleRetirement

Ask the Expert: Choices for an inherited IRA

A young beneficiary's annual RMDs are very small

A young beneficiary's annual RMDs are very small because they're based on her life expectancy -- and although RMDs are taxable, the balance of the Inherited IRA remains tax-deferred. Its value could easily double over the next 20 years. Photo Credit: iStock

My 36-year-old daughter was her younger brother's 401(k) beneficiary. He passed away this year. The investment firm has put his account into her name and told her she can keep it in the 401(k) plan for up to five years without any tax liability. At the end of that time, she would receive a full, taxable distribution. Alternatively, they said at any time during the five years she can transfer it to an Inherited IRA in her brother's name, with herself listed as beneficiary, and she wouldn't have to take a required minimum distribution (RMD) from the Inherited IRA until age 70. Is this an accurate description of her choices?

Not entirely.

As a non-spouse beneficiary, your daughter has two options. The first is to leave the account untouched for five years and then empty it, paying taxes on the entire amount. From what you say, she must take that option if she stays in the 401(k) plan.

The alternative is indeed to transfer the money into an Inherited IRA in her brother's name, listing herself as beneficiary. But it's not true that if she does that, she can postpone taxable RMDs until after she's 70. Her deadline for taking the first annual RMD from the Inherited IRA is Dec. 31 of the year following her brother's death, says Barry Picker, a Brooklyn tax accountant and IRA expert.

An Inherited IRA is the better choice. A young beneficiary's annual RMDs are very small because they're based on her life expectancy -- and although RMDs are taxable, the balance of the Inherited IRA remains tax-deferred. Its value could easily double over the next 20 years. And your daughter would still have the option of emptying and paying taxes on the entire account if she wished.

The bottom line An Inherited IRA combines tax-deferral and flexibility. Websites with more information 1.usa.gov/19bGW8G and 1.usa.gov/16YZZ0d

Comments

We're revamping our Comments section. Learn more and share your input.

More Lifestyle