Retired Death Distribution

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Retired Death Distribution

May 24th, 2009

The designated beneficiary of an IRA is subject to IRA Required Death Distribution (RDD) rules when the IRA owner passes away.

Failure to take the Required Death Distribution or RDD may subject the beneficiary to an excise penalty tax of 50% of the amount that should have been distributed. Each Traditional IRA account and SIMPLE IRA account stands on its own for purposes of determining post-death Required Minimum Distribution (RMDs).

Important Points About Required Death Distribution

By naming any person or entity (other than the IRA owner’s estate) as beneficiary, the IRA individual retirement account avoids estate probate proceedings. However, avoiding probate does not mean the IRA necessarily avoids estate taxes. The value of a decedent’ s IRA is included in the estate for estate tax purposes. However, any IRA assets for which a surviving spouse or charitable organization are the beneficiaries will be eligible for exclusion from the taxable estate.
Under Ira Distribution Rules, distributions from the decedent ’s IRA are not subject to the 10% premature distribution penalty, even if the spouse or non-spouse beneficiary has not turned 59 � years old, but may be subject to ordinary income taxes.
If the beneficiary decides to change the institution where the decedent IRA account is being held, a direct transfer can occur to move the decedent’ s IRA from one institution to another, as long as the new institution accepts it. The IRA at the new institution may remain in the name of the decedent for the benefit of the beneficiary. The Ira Rules state that this transfer is not, by itself, a taxable event.

If the spouse is the sole designated beneficiary and is substantially older than the IRA owner, the beneficiary may wish to leave the IRA in the decedent spouse’s name and wait to make a choice until the end of the year in which the decedent would have turned age 70 �. However, if left as a Beneficiary IRA, the IRA will be paid to the surviving spouse’s estate upon his or her death, unless a remainder beneficiary is named. (see also: Stretch-out IRA Option)

All or a portion of an Ira Distribution from a decedent’s IRA may qualify as Income in Respect of a Decedent or “IRD”. If the IRA owner’s estate paid estate taxes, then the percentage of those taxes attributable to the value of the IRA may be deducted by the beneficiary to offset income from an Ira Distribution. The IRD rules are complex and we strongly recommend IRA owners and their beneficiaries consult with a tax or legal advisor regarding this issue.