A widowed parent has two children listed as beneficiaries to a small IRA and passes away at age 91. I've heard that different theories on how the money in the IRA passes to the children. Some say they would need to take it as a new IRA in their name, and then pay taxes on it when withdrawn. Some people say it has to be withdrawn in 5 years or less. Other opinions say that the children can get a cash disbursement from the IRA, but do not know of tax implications. Can anyone here share accurate info or reading on this matter?
We submitted an inheritance designation for the IRAs, identifying primary and secondary beneficiaries. On the event of death, as I recall the IRAs would be retitled in the name of the beneficiaries. But I don't recall that they were considered "new" IRAs, for tax or other purposes. However, see the last section with a URL for an IRS publication which addresses keeping the IRA in the name of the person from whom it was inherited.
I also don't recall how they're treated in terms of value when they're inherited, i.e., if they're at face value or a basis value of the deceased holder. I really don't have much knowledge of the inherited value issue and wouldn't want to provide misleading information.
Mandatory withdrawals depend on the age of the beneficiary. If he/she is of the age when minimum required distributions are required, then the beneficiary must begin taking the withdrawals.
If not, and here's what I don't remember because it didn't apply to us - I don't know for sure but think that the IRA could continue to accrue interest without distribution until the minimum distribution age was reached. However, I believe that withdrawals could be taken.
There may be a question whether such early withdrawals would be subject to tax rate of the beneficiary and what that basis is and how it's calculated given that it's inherited.
These are really issues for a qualified tax or estate planning specialist to explain. Hopefully one of the experts will see this post and offer some clarification.
The IRS publishes a booklet on IRAs, Publication 590 (A and B):
http://www.irs.gov/publications/p590b/ch01.html#en_US_2014_publink1000230538.. This might help.
See the section: "Inherited from someone other than spouse. "
This is about all I remember right at the moment. I think you could call the holder (investment company) of the IRA, or speak with the attorney who drafted any estate plan for the parent who recently died at age 91 to get some guidance on options and penalties.
But I wouldn't listen to "some people" or "others". These can be complicated issues and the best sources are the legal and tax professionals who know the details.