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Understanding IRA Distribution
To understand the advantage to an IRA Stretch Trust, it is necessary to understand basic IRA distribution rules. First, IRA funds are not taxed until they are withdrawn from the IRA account. Second, distributions to the IRA owner must begin at the required beginning date. The required beginning date is the date upon which the IRA owner must take the first required minimum distribution. It is set by the IRC as April 1 of the year following the year in which the IRA owner turns 70 ½ years old. All other required annual distributions must be made by December 31 of each year after the required beginning date.
Third, once distributions begin, the required distribution must be made. Determining the required distribution is actually a simple calculation. The distribution for any year is calculated as the prior year’s December 31 account balance divided by the applicable life expectancy factor. The correct life expectancy factor to use is determined by the average life expectancy tables. The correct table to use depends upon whether you are the IRA owner or the beneficiary.
Fourth, distributions must continue after the IRA owner dies in one of two ways. If the IRA beneficiary is a surviving spouse, the surviving spouse may roll the IRA over or may take distributions from the IRA as any other non-spouse beneficiary could. If the IRA beneficiary is not a surviving spouse, dependent upon how the IRA owner designated the individual beneficiaries, the non-spouse beneficiaries may:
a) Have to take the full distribution of the IRA with 5 years of the IRA’s owner’s death,
b) Have to continue to make required minimum distributions over the remaining life expectancy of the now deceased IRA owner,
c) Have to take required minimum distributions over the life expectancy of the oldest IRA beneficiary, or may have the option where
d) Each beneficiary may take required minimum distributions over his or her own life expectancy resulting in the maximum tax deferred growth and distributions for each individual Beneficiary.
Which of these four choices apply is dependent upon how the IRA owner designated the individual beneficiaries and post-death minimum distributions. The beneficiary’s ability to stretch the IRA depends on whether or not the beneficiary is a designated beneficiary. Being a “designated beneficiary” of an IRA means something very specific and important. It means stretch distributions from the IRA can be made over the designated beneficiary’s lifetime. A designated beneficiary is an individual, a group or class of individuals, or certain “see through” Trusts This term does not include your estate, corporate entities, charities or non-human living things. If an IRA dies before his or her beginning date without a designated beneficiary, the IRA must be fully paid out within 5 years of death. The result is all possibility of extended tax deferred distributions in the IRA being lost. This result is not significantly better if the owner dies after his or her required beginning date without a designated beneficiary. In that case, the IRA must be paid out over the deceased IRA owner’s remaining life expectancy using the single life table.
If instead the owner has a designated beneficiary, death before or after the required beginning date is immaterial. The designated beneficiary will be allowed to stretch distributions over his or her own lifetime using the single life table. Please keep in mind that just because a designated beneficiary could take lifetime stretch distributions from the IRA does not mean that the designated beneficiary won’t cash out the IRA early. Remember the average beneficiary spends their entire inheritance within 18 months of death.
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Meurer Law Offices
5347 S. Valentia Way, Suite 220
Greenwood Village, Co. 80111
303.991.3544
Estate Planning Attorney
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MEURER LAW OFFICES, P.C.
5347 South Valentia Way, Suite 220
Greenwood Village, CO 80111
Phone: 303-991-3544
