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A recent call with a financial advisor in Louisiana reflects a common question about IRAs and estate beneficiaries.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business.
“A client with a traditional IRA passed away recently. The client’s estate is listed as the IRA beneficiary. What required minimum distribution (RMD) rules apply, and when must the IRA be fully distributed?”
If the IRA owner’s estate is the beneficiary of their traditional IRA, either by designation or default, the RMD rules that apply will depend on whether the IRA owner died before, or on or after, their required beginning date (RBD) for RMDs. The RBD for an IRA owner is April 1 of the year following the year they reach the applicable age, currently age 73, increasing to age 75 for individuals born in 1960 or later.
If the IRA owner dies prior to their RBD, the estate may take a lump-sum distribution at any time, but the account must be fully distributed to the estate by December 31 of the calendar year containing the fifth anniversary of the IRA owner's death.
If the IRA owner dies on or after their RBD, the estate may take a lump-sum distribution at any time or take annual distributions over the IRA owner’s remaining life expectancy.
If the IRA owner died before the RBD and the five-year rule applies, no minimum annual distributions are required during the first four years; rather, the rule is satisfied as long as the account is fully distributed by the end of the calendar year that includes the fifth anniversary of the IRA owner’s death.
If the IRA owner dies on or after their RBD, note that there is no separate 10-year payout deadline; distributions continue based on the deceased owner's remaining life expectancy, reduced by one each year.
If an IRA owner fails to designate a beneficiary during their lifetime, the terms of the IRA agreement will generally provide default options. In such cases, the IRA owner’s estate may become the beneficiary of the IRA by default. Therefore, by designating a beneficiary and keeping the designation current, IRA owners can ensure the assets pass to heirs according to their wishes.
The SECURE Act and subsequent regulations overhauled the rules applicable to designated beneficiaries, including distinguishing between “eligible” designated beneficiaries and designated beneficiaries who are “not eligible” designated beneficiaries. It did not, however, change the rules that apply when there is no designated beneficiary, such as when an estate is the beneficiary.