Generally, the goal when naming beneficiaries on an Inherited IRA is for them to stretch required minimum distributions out as long as possible. The tax code and current regulations support this goal by making the stretch option the default. However, assuming your IRA agreement allows for a stretch option, there are rules you must follow.
- Specific names are on the beneficiary form.
- Split the IRA into one separate account for each beneficiary by December 31st of the year following the IRA owner’s death.
Assuming you meet both requirements, heirs can stretch distributions over their own life expectancy. For those in their 30’s, the stretch can often be 40 – 50 years.
Splitting an Inherited IRA After the Deadline
Splitting an Inherited IRA after the deadline results in a different life expectancy calculation. In this scenario, the stretch for all heirs is calculated from the life expectancy of the oldest. For younger beneficiaries this shortens the stretch, and decreases the benefit from an Inherited IRA.
For example, Mom and her three children inherit an IRA. Splitting that IRA into four separate accounts, all the children use Mom’s life expectancy to calculate their stretch. This is based on the current year’s factor and a simple mathematical formula.
Using the The Single Life Expectancy Table, the IRA custodian looks up Mom’s age and gets her factor. Next, the factor is reduced by one for each year a RMD is due. This determines the stretch. Each heir use that factor regardless of their current age.