September 30th is the beneficiary determination date for those who inherited an IRA from a person who deceased in 2011. This is the date which determines whose life expectancy is used for "stretch IRA" payments. The life expectancy used is based upon the age of the oldest "designated beneficiary." Here a summary points to know:
- The "stretch IRA" is not a product rather it is a common term for the ability to take the Required Minimum Distributions over the beneficiary's life expectancy. This keeps the bulk of the IRA in the tax deferred wrapper of the IRA and minimizes the tax burden for the beneficiary by only requiring the minimum distributions if taxable. If the inherited IRA is a Roth IRA, then the minimum distributions would be tax free however as indicated, the bulk of the account would remain growing in the inherited Roth IRA tax free.
- Only a living, breathing person can be a designated beneficiary and must be named on the beneficiary form. A charity, trust, or estate is does not have a life expectancy and thus the stretch can be lost or minimized if a non-person is a beneficiary. Naming an IRA beneficiary through your will results in no designated beneficiary and loss of the stretch.
- 9/30 is the beneficiary determination date. You cannot add beneficiaries however existing beneficiaries can be paid out before this date. For example if a charity is a beneficiary the stretch can be lost because a charity does not have a life expectancy and the payout period can be limited to 5 years if the owner did not reach their Required Beginning Date (RBD) or the owner's remaining life expectancy if past the RBD. The solution would be to pay out the charity's share before the 9/30 deadline.
- If you are the single named beneficiary, then you will be able to use your age in determining the applicable stretch period. If there are multiple beneficiaries, the age of the oldest beneficiary will be used.
- A beneficiary named through an estate can never be a "designated beneficiary" and therefore the stretch will be limited to 5 years or the remaining life expectancy of the IRA owner.
- When there are multiple beneficiaries, especially if one is a non-person, the accounts can be split, and thus undesirable beneficiaries effectively removed if done prior to the 9/30 date. In order for multiple individual beneficiaries to use their own life expectancy, the accounts must be split by 12/31 of the year after death.
- There are special rules when a trust is named as a beneficiary; get professional help if this applies to you or are thinking of naming a trust as a beneficiary.
- Inherited IRAs can be split after the 12/31 deadline however each inherited IRA owner will still be stuck with the age of the oldest beneficiaries life expectancy for calculating minimum distributions.
- While Roth IRAs do not have lifetime Required Minimum Distributions, they do have RMDs for inherited Roth IRAs.