5 year rule on inherited IRA
I have a client who’s brother recently died. He had unfortunately left his 401k beneficiary as his estate. The deceased brother had 2 sons that inherited that account – about 500K. As there was not a designated beneficiary, they are subject to the 5 year distribution rule – does that need to come out 20% each year, or can it all come out in the 5th year? I can’t remember what the schedule is for the 5 year distributions. Does anyone know offhand?
Permalink Submitted by Alan Spross on Wed, 2011-05-25 21:55
The decedent must have passed prior to his RBD, since the 5 year rule only applies in that situation.
There is no “schedule” to the 5 year rule. There are 6 calendar years included under the rule, ie the partial year in which the owner died, and the 5 full calendar years that follow. Any amount or no amount can come out in any of those years, with the only requirement being that the full balance must be distributed by the end of the 5 year period. In many cases, making the distribution fairly equal will eliminate having a large increase in the tax rate for any year with a very large distribution.
Note that your post title refers to an inherited IRA, but the text refers to a 401k. If this was a 401k with the estate as beneficiary, then there is no designated beneficiary and no possibility of doing a transfer to an inherited IRA for the estate beneficiares. The plan is even allowed to require a lump sum distribution since a plan can adopt more restrictive RMD provisions than the IRS rules. If it was an inherited IRA, this situation would be avoided.