Inherited IRA (Lump Sum vs Stretch)
My client’s mother died. She was in her late 50s early 60s. Daughter and son inherit the IRA 50%/50%, ether are in their 30s. The daughter wants to take 1/2 of her share in lump sum and the other 1/2 keep in an IRA and stretch over her lifetime. Can she do that? I just want to be sure. I didn’t know whether you have to keep all of the IRA in order to stetch.
Permalink Submitted by Alan Spross on Wed, 2008-07-23 21:02
They do not have to keep any amount in the IRA in order to use life expectancy for what is left. In this case, the two beneficiaries should probably create their separate accounts first, after which each can take their RMD in any fashion they wish. That avoids complex accounting for gains or losses when distributions are taken prior to creation of the separate accounts. But the absolute deadline for separate accounts that enable each to use their own life expectancy is 12/31 of the year following owner’s death.
The only penalty is for failing to take at least the RMD amount. Any amount in excess of the RMD amount is fine except that taking a large amount destroys the tax deferral and may even inflate the marginal tax rate for the year of the large distribution.
These beneficiaries should also determine if there was any tax basis in the IRA that they would inherit. Also, they should name their own successor beneficiaries ASAP.