Treasury regulation: Death before the required beginning date Treasury regulation: Determination of the designated beneficiary Treasury regulation: Required minimum distributions Treasury regulation: IRA distribution requirements IRS Publication 590 B: Distributions from Individual Retirement Arrangements Internal Revenue Code section 408A: Roth IRAs Internal Revenue Code section 691: Income in respect of a decedent Internal Revenue Code section 1014: Basis of property acquired from a decedent Internal Revenue Code section 661: Estate and trust distribution deductions Internal Revenue Code section 662: Beneficiary income inclusion Internal Revenue Code section 663: Distribution exclusions Minnesota: Personal representative appointment and commencement of administration Minnesota: General duties of personal representatives Minnesota: Transactions authorized for personal representatives

What happens when an estate is named as an IRA beneficiary?

Key takeaway

An estate is not a designated IRA beneficiary, so payout generally follows the five year rule for death before the required beginning date, or annual distributions over the owner’s remaining life expectancy for death on or after that date.

The payout deadline depends on when the owner died

If the owner died before the required beginning date and the estate is the beneficiary, the entire IRA must be distributed by the end of the calendar year containing the fifth anniversary of death.

If the owner died on or after the required beginning date, annual distributions use the owner’s remaining life expectancy, rather than an estate heir’s life expectancy, and continue until the account is fully distributed.

Use the Single Life Table and the owner’s age on their birthday in the calendar year of death to determine the initial life expectancy. Reduce that figure by one for each subsequent calendar year.

Ask the IRA custodian to confirm the owner’s required beginning date and the applicable distribution calculation before requesting a payout.

Estate administration depends on state law

In Minnesota, for example, acquiring a personal representative’s powers generally requires appointment by court or registrar order, qualification and issuance of letters, except as otherwise provided in article 4. Administration begins when letters are issued, and other states differ.

Gather the beneficiary designation, account agreement and any appointment documents for the estate’s advisers to review.

Traditional IRA payments can carry income tax

Taxable traditional IRA distributions received by a beneficiary are included in gross income as ordinary income. Inherited basis from nondeductible contributions remains with the IRA, and the portion representing nondeductible contributions or rolled over after tax amounts is tax free.

A payment to the estate does not necessarily leave all resulting income tax with the estate. Income required to be distributed currently and other amounts properly paid, credited or required to be distributed can produce an estate deduction and beneficiary income inclusion.

The estate deduction cannot exceed distributable net income, and distributed income retains its character. Exclusions apply to qualifying specific gifts or bequests, qualifying charitable amounts and amounts already treated under the applicable distribution provisions for a preceding year.

Ask the estate’s tax adviser to review the proposed IRA withdrawal alongside planned estate distributions.

Roth IRA payout and tax qualification are separate

After a Roth IRA owner dies, distribution rules apply as though the owner died before the required beginning date. An estate beneficiary therefore follows the five year payout rule.

A Roth IRA payment to the estate after death can be excluded from gross income as a qualified distribution only after the applicable five taxable year qualification period has elapsed.

That period begins with the first taxable year for which a contribution was made to a Roth IRA established for the owner. Death alone does not satisfy it, and returned excess contributions and their allocable earnings are not qualified distributions.

The qualification period is separate from the estate’s payout deadline.

Personal representative

In Minnesota, for example, a personal representative must settle and distribute the estate under an effective probated will and applicable law, as expeditiously and efficiently as the estate’s best interests permit. Acting reasonably for interested persons’ benefit, the representative may receive assets, subject to will restrictions, formal court orders and statutory distribution priorities, and other states differ.

Income in respect of a decedent

This is income qualifying under the federal rule that, when the estate acquires the right from the decedent, is included in the estate’s income for the year received. That income component receives no basis adjustment at death, while inherited IRA basis from nondeductible contributions remains with the IRA.

Resources to open next

Retirement accounts and beneficiaries. Open this guide to compare the estate beneficiary situation with other retirement beneficiary arrangements before discussing future designations.
Retirement account records and questions checklist. Use this checklist to organize the designation, account records and payout questions for your conversation with the custodian.
Estate administration. Read this guide to frame the administration questions that sit alongside the IRA payout decision.
Basis and trust tax records and questions checklist. Bring this checklist to the tax discussion so inherited IRA basis and proposed estate distributions receive attention together.

Common questions

Does inheriting under the will make someone the IRA’s designated beneficiary?

No. Inheriting under a will or state law does not make someone a designated beneficiary without a designation under the account’s governing terms.

Is an unpaid required minimum distribution still due for the owner’s death year?

Yes, if the owner died on or after the required beginning date. Any unpaid portion of the owner’s required minimum distribution must be paid to the beneficiary or beneficiaries during that calendar year.

Does the estate owe the 10% early distribution additional tax?

No, when it receives a traditional IRA distribution in its estate capacity following the owner’s death, including death before age 59½. Ordinary income tax still applies to the taxable portion.

A surviving spouse who elects to treat the IRA as their own may owe the additional tax on later distributions received before age 59½.

Can a beneficiary deduct estate tax connected with IRA income?

Yes, if federal estate tax was paid on the portion of a traditional IRA distribution that is income in respect of a decedent. The beneficiary claims the deduction in the tax year that income is reported.

A taxable distribution component that is not income in respect of a decedent does not support this estate tax deduction.

Sources

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