Those fortunate enough to be named a beneficiary of a retirement account will want to know the nuances for reporting income on their tax return. This is specifically important when the account holder passes away before or after the time they are supposed to take required minimum distributions (RMDs).
What are required minimum distributions?
Traditional IRA and 401(K) account holders are required to start taking minimum distributions when they reach the age of 70 ½, even if they are still working for an employer at the time. However, in the first year they are required to take distributions, they can defer it until April 1st of the following year.
What if the account holder passes away after taking RMDs?
The beneficiary must take the RMD in the year the account owner dies if the process was already started by the deceased. However, if the RMD was already taken for the year, then no RMD would be necessary as the requirement was already satisfied. This is referenced in IRC Section 401(9)(A).
Separately, please also note that if the designated beneficiary is not the surviving spouse, distributions (based on the beneficiaries life expectancy) must commence no later than the end of the calendar year immediately following the calendar year in which the participant died. The beneficiary’s life expectancy is determined by using his/her age in the calendar year immediately following the account holder’s death. This distribution period is reduced by “one” for each year that has elapsed since the date life expectancy was first calculated.
What if the account holder passes away before their required beginning date?
The beneficiary is not required to take a distribution for the year in which the account holder passes away. Rather, they only need to start taking RMDs on their own inherited account by 12/31 of the following year.
Do you have more personal tax questions? If so, please contact us.