separate share rule for inherited IRAs
I am confused by the separate share rule. If an IRA owner designates two individual beneficiaries (not a trust) for his IRA, upon his death does his IRA automatically divide into two separate inherited IRAs, one for each beneficiary? Or is something more required? And if so, can each beneficiary use his own individual life expectancy for RMDs or are they somehow both stuck with the older’s life expectancy?
Permalink Submitted by Alan Spross on Wed, 2012-02-01 22:54
If an IRA owner passes with two designated beneficiaries and separate accounts are not created by 12/31 of the year following owner’s death, the age of the oldest beneficiary must be used for the RMDs of each. If the separate accounts are created by the deadline, each can use their own individual life expectancies for their RMDs starting in the year the separate accounts are created.
But there are two other benefits of separate accounts. The accounting is much easier and clearer in separate accounts than having to keep track of the value of each beneficiaries interest in the combined account, considering that they probably will not take out identical amounts. There is also easier investment independence and clearer successor beneficiary designations.
If the deadline is not met for individual life expectancies, it is still wise to create the separate accounts for the other reasons stated above. The IRS custodian will usually push for separate accounts as it makes things much easier for them as well.
The worst situation is when an owner passes before the RBD and there is a non individual beneficiary such as a charity included with individual beneficiaries and the deadline is missed and the charity not paid off. Since the charity has no life expectancy, the individual beneficiaries would then be stuck with the 5 year rule, having to drain their interests by the end of the 5th year following death.
If the beneficiaries are both a surviving parent and children, and the deadline is missed, the children will be stuck using the shorter life expectancy of the parent, whereas the surviving parent can roll their share over to their own IRA at any time reducing their RMD or delaying it, while the children have lost much of their stretching capacity.