Ask the Expert: IRA beneficiaries

It sounds as if you were not the designated IRA beneficiary, but instead inherited the account through your father's estate. Although it may seem the same, the tax consequences are very different.

Here's an example. Joe inherits his father's $500,000 IRA. If his father listed him on the IRA beneficiary designation form, Joe can stretch annual distributions from that account over his own life expectancy, as listed in the Internal Revenue Service actuarial table. If Joe is 40 years old, his life expectancy factor is 43.6. That means his first annual minimum distribution is $500,000 divided by 43.6, or $11,468. Joe owes income taxes on his distributions, but the account balance keeps growing tax-deferred.

If Joe's dad didn't designate an IRA beneficiary, his estate becomes the default beneficiary. Joe can still inherit the IRA as heir to the estate, but he can't base account distributions on his own age. If his father was older than 701/2 when he died, Joe must base his distributions on his father's age at death. If his dad was 85, for example, Joe's first distribution -- based on the life expectancy factor of an 85-year-old -- is $65,789. If Joe's dad was younger than 701/2 when he died, Joe must empty the IRA over the next five years. His first taxable distribution is $100,000.