SPLITTING INHERITED IRAS BEFORE YEAR’S END

If you or others were the beneficiaries of an inherited IRA whose owner died in 2011, December 31, 2012 is an important deadline.

Tax law requires a non-spouse beneficiary of an inherited IRA who wishes to spread distributions from the IRA over his or her lifetime to begin taking distributions from an inherited IRA account by the end of the year after the year of the IRA owner’s death. These distributions are based upon the life expectancy of the beneficiary and are called required minimum distributions (RMDs).

However, where there are multiple beneficiaries, the life expectancy used to determine the RMDs from the IRA is based upon the age of the oldest beneficiary. Thus, younger beneficiaries would be required to take their RMDs over a shorter period of time than their life expectancy would otherwise require.

This oldest beneficiary rule can be overcome by splitting the inherited IRA into multiple IRA accounts, equally divided among the beneficiaries, before December 31 of the year following the year of the IRA owner’s death. Where an IRA is divided into separate accounts (i.e., subaccounts), the RMD rules separately apply to each separate account, effective for years after the year in which the separate accounts were created or the IRA owner’s date of death, if later.

Additionally, a separate accounting must allocate all post-death investment gains and losses for the period before the separate accounts were established on a pro rata basis in a reasonable and consistent manner among the separate accounts. However, once the separate accounts are actually established, each beneficiary can make his or her own investment decisions from that point on.

If you have questions related to this RMD requirement, please give this office a call.