Is “stretch” IRA a recent option?
My mother died in 2000, leaving me several IRAs. I did not need the money immediately, as I had a good job and my own savings. However, her bank informed me that I had to take take it all out within 5 years or they would automatically send me the total distribution in a lump sum after the 5 years. Obviously, I didn’t want to pay income tax on the total amount, so took distributions in equal amounts over 5 years.
I asked them if there wasn’t some alternative option that would allow me to keep the money somewhere and continue accruing interest. I was told that even if I put it into an account of my own, it would be considered a distribution and either they could take taxes out first, or I could declare it on my IRS forms as income myself.
Was that a lie, or is this “stretch” over my estimated lifetime a new thing since 2000?
Permalink Submitted by Alan Spross on Fri, 2008-06-06 02:37
Your situation occurred during a transition period allowed by the IRS RMD Regulations that were issued in April, 2002. When those Regs were issued the default rule for owners who passed prior to their required beginning date (apparently the case with your mother) was changed from the 5 year rule to the life expectancy of the beneficiary.
These new Regs allowed those beneficiaries under the 5 year rule to convert to life expectancy providing they made up the life expectancy distributions by 12/31/03. Accordingly, you had an opportunity to change over to lifetime RMDs, but were never made aware of it. I will leave it up to you to determine whether you asked or whether the bank should have informed you automatically. The following is copied from the 2002 Regs summary:
>>>>>>>>> >>>>>>
final regulations
provide a transition rule that permits
beneficiaries subject to the 5-year rule
under the 1987 proposed regulations to
switch to the life expectancy rule,
provided that all amounts that would
have been required to be distributed
under an application of the life
expectancy rule are distributed by the
earlier of December 31, 2003 or the end
of the 5-year period following the year
of the employee’s death.
>>>>>> >>>>>>>>>>>>
In summary, the change did occur after your mother’s death, however there was an opportunity to transition to lifetime distributions, so the key question is whether you asked the bank after April, 2002 or prior. There may have been other opportunities to become aware of that window prior to 12/31/2003 as well from the general financial media etc, but unfortunately it looks like that fell through the cracks.
Permalink Submitted by Nancy Kinal on Mon, 2008-06-09 14:09
I also just inherited an IRA from my dad, and the bank is telling me the same 5 year to take distributions. Is that correct? And, if so, how much should I take based on the life expectancy table? Distribute it evenly, take the minimum for 4 years, then the rest in the 5th year. I am currently 53.
Permalink Submitted by Bruce Steiner on Wed, 2008-06-11 02:18
Why can’t you take it out over your life expectancy?