Ask the Expert: Choices for an inherited IRA
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. Credit: iStock
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.
