What Happens to Your IRA When Your Beneficiary Dies?

By Beverly DeVeny, IRA Technical Expert
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So, what happens to your IRA when your beneficiary dies? It all depends if the beneficiary dies before or after you. Let’s look at a few examples to illustrate the differences.

Beneficiary Dies after the Account Owner
Over the years we have all heard and read a lot about the “stretch” IRA. This is when your IRA goes to your children or other non-spouse beneficiaries at your death and they get to take distributions over their own life expectancies. Some beneficiaries don’t cash out the IRA immediately at the account owner’s death; they actually set up inherited IRAs and then take out only required minimum distributions (RMDs) each year based on their own life expectancy. But what happens if that beneficiary dies while there are still funds in the inherited IRA?

The answer will depend on whether or not the IRA custodian will allow the inherited IRA to continue to distribute RMDs to a successor beneficiary and, perhaps more importantly, whether or not the IRA beneficiary named a successor beneficiary.

To make this simpler, I am going to use names here. When Peggy inherits an IRA from her mother, one of the first things she should do is name her own beneficiary – known as a successor beneficiary. Let’s say that Peggy names Tom as her beneficiary. If Peggy dies before emptying the inherited IRA account, Tom will automatically inherit the IRA from Peggy – as long as the IRA custodian allows this.

Peggy’s RMDs are based on the factor for her age in the year after her mother’s death. Let’s say that Peggy’s factor is 35.1. That is the payout term for the inherited IRA. Each year Peggy, or her subsequent beneficiary, will reduce that factor by 1.

When Tom inherits, he “succeeds” to Peggy’s inherited IRA account. Tom cannot restart the required distribution calculation. He “succeeds” to Peggy’s calculation and continues on with Peggy’s schedule, continuing to reduce Peggy’s factor by one each year. Tom should now name his own successor beneficiary. No matter how many beneficiaries eventually inherit Mom’s IRA that was originally left to Peggy, they all have to continue using Peggy’s life expectancy. 

What happens if Peggy never names a successor beneficiary or does not have a living successor beneficiary named at the time of her death? Most of the time, the IRA agreement will say that the inherited IRA now goes to Peggy’s estate. It becomes a probate asset. It can still continue paying out over Peggy’s life expectancy subtracting one each year but the payments may not go where Peggy wanted them to go.

Beneficiary Dies Before the Account Owner
This should not be a problem but it is. The IRA owner should always name both primary and contingent beneficiaries. Then, if the primary beneficiary predeceases the IRA owner, and he does not update the beneficiary form, the contingent beneficiary would inherit the IRA. Alternatively, the IRA owner could update the beneficiary form after the death of the beneficiary and all would be fine. But many times neither one of these things happen.

When the IRA is inherited through the estate or will, then distributions will be made one of two ways depending on the age of the IRA owner at the time of his death. The determining date is called the required beginning date (RBD). It is April 1 of the year after the IRA owner attains age 70 ½. Here are five additional facts you should know about your RBD.

Let’s say that John dies at age 68. He has died before his RBD so his IRA will have to pay out to the heirs of his estate over a 5-year period. Now, let’s say that Brad dies at age 72. He has died after his RBD so his IRA can pay out to the heirs of his estate over Brad’s remaining life expectancy.

Let’s look at one last example. Rose dies at age 70 ½. Now you have to see if Rose died before or after April 1 of the year after she turned age 70 ½ to determine if the heirs of her estate must use the 5-year payout or if they can use Rose’s life expectancy.

Bottom line, keep those beneficiary forms up to date. Your beneficiaries will thank you.

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