Question: Mary passed away in 2020 at the age of 80. She had a traditional IRA account from which she had been withdrawing her required minimum distributions (RMDs). Her daughter Lucy, who was a designated beneficiary, wants to know the tax implications of inheriting the IRA and her options for distributions.
Answer: As a designated beneficiary, Lucy has two options for the IRA she inherited from Mary.
Option 1
As a non-spouse beneficiary, Lucy may choose to roll over Mary’s IRA when it is transferred in a direct trustee-to-trustee transfer to another traditional IRA if the new IRA is in Mary’s name for Lucy’s benefit. Since Mary was required to take RMDs at the time of her death, Lucy must then take RMDs over her life expectancy and distribute the remaining balance by the end of the 10th year following the year of Mary’s death (2030).
Option 2
Lucy can liquidate or cash out the plan completely and pay ordinary income taxes on the distribution for the year in which she withdraws the money.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.