IRA Beneficiaries: Know Your Distribution Options
If you are the beneficiary of an IRA at the time the account owner dies, you will have several choices when deciding what to do with the money in the account. Your options depend on whether you are the spouse of the deceased account owner and whether the deceased account owner had reached the required beginning date (RBD) for taking minimum distributions from the account.

Generally, the RBD is April 1 of the year after reaching age 70 ½. There is no minimum distribution requirement for Roth IRAs, so Roth IRA beneficiaries can choose from the first set of options below.

The IRA Owner Died Before the RBD
The IRA Owner Died On or After the RBD  

The IRA Owner Died Before the RBD
You will need to select from the following options if you are the beneficiary of a traditional, Rollover, SEP-, SARSEP- or SIMPLE-IRA and the account owner died before the RBD. These options also apply to the Roth IRA. All beneficiaries have the option of taking a lump sum distribution at any time.

• Inherit Option. You may inherit your portion of an IRA and treat it as one established on your behalf. You may be able to contribute to it depending on your age and income, and it can continue to grow and compound without tax consequences until funds are withdrawn.
• Life Expectancy Option.* You must take annual distributions if you choose this option. The minimum amount you must take each year is based on your single life expectancy as calculated from an IRS table. Your life expectancy is recalculated each year. You must begin taking distributions by the later of December 31 of the year the account owner would have reached age 70 ½ or December 31 of the year following the account owner's death.
• 5-Year Rule Option.* With this option, you must withdraw the entire balance of the account by December 31 of the year containing the fifth anniversary of the account owner's death. The money can be withdrawn in payments or all at once. The money is taxed when withdrawn, so withdrawing all the money in five years could leave you with a substantial tax burden. This option also leaves less time for the money to grow tax deferred.
• Default Option. You must choose an option by December 31 of the year following the account owner's death. If you don't choose an option by that date, the Inherit Option will apply.

• Life Expectancy Option.* You must take annual distributions if you choose this option. The minimum amount you must take each year is based on your single life expectancy as calculated from an IRS table. Your life expectancy is not recalculated each year. You must begin taking distributions by December 31 of the year following the account owner's death.
• 5-Year Rule Option.* With this option, you must withdraw the entire balance of the account by December 31 of the year containing the fifth anniversary of the account owner's death. The money can be withdrawn in payments or all at once. The money is taxed when withdrawn, so withdrawing all the money in five years could leave you with a substantial tax burden. This option also leaves less time for the money to grow tax deferred.
• Default Option. You must choose an option by December 31 of the year following the account owner's death. If you don't choose an option by that date, the Life Expectancy Option will apply.

• 5-Year Rule Option.* You must withdraw the entire balance of the account by December 31 of the year containing the fifth anniversary of the account owner's death. The money can be withdrawn in payments or all at once. The money is taxed when withdrawn, so withdrawing all the money in five years could leave you with a substantial tax burden. This option also leaves less time for the money to grow tax deferred.

Back to Top 

The IRA Owner Died On or After the RBD
You will need to select from the following options if you are the beneficiary of a traditional, Rollover, SEP-, SARSEP- or SIMPLE-IRA and the account owner died on or after the RBD. All beneficiaries have the option of taking a lump sum distribution at any time.

In addition, all beneficiaries must withdraw the account owner's distribution for the year of death if it has not already been taken.

If you are a spouse beneficiary:

• Inherit Option. You may inherit your portion of an IRA and treat it as one established on your behalf.
• Life Expectancy Option.* You must take annual distributions if you choose this option. The minimum amount you must take each year is based on the longer of either your single life expectancy or the remaining life expectancy of the deceased account owner, based on that person's age at death, as calculated from an IRS table. Your life expectancy is recalculated each year. You must begin taking distributions by December 31 of the year following the account owner's death.

If you are a beneficiary and not a spouse:

• Life Expectancy Option.* You must take annual distributions, and the minimum amount you must take each year is based on the longer of either your single life expectancy or the remaining life expectancy of the deceased account owner, based on that person's age at death, as calculated from an IRS table. Your life expectancy is not recalculated each year. You must begin taking distributions by December 31 of the year following the account owner's death.

If you are a beneficiary and not an individual (e.g. a charity):

• Life Expectancy Option.* You must take annual distributions, and the minimum amount you must take each year is based on the remaining life expectancy of the deceased account owner, based on that person's age at death, as calculated from an IRS table. The life expectancy is not recalculated each year. You must begin taking distributions by December 31 of the year following the account owner's death.

It can be difficult making decisions during emotional times, so consider your options carefully when deciding what to do with the account. Make sure your decision is in line with your personal investing goals and your overall financial plan.

Back to Top

This information is for educational purposes only and is not intended as investment advice.

This article is from the Financial FYI® series produced by the Education & Guidance department of American Century Investments. "Financial FYI" is a registered mark of American Century Services Corporation.

Learn more about American Century Investments.