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Rules for an inherited IRA
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August 16, 2000: 10:35 a.m. ET
Start by asking: Who is the beneficiary and when did the IRA owner die?
By Ed Slott
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NEW YORK (CNNfn) - Figuring out the rules and the tax options are complicated enough if you have an IRA, but it's even worse if you inherit one.
Many times, beneficiaries don't know where to turn for help, and they get different interpretations of these complex IRA distribution rules. But if you go step by step, the rules aren't that bad. You just need to answer two questions: Who is the beneficiary; and when did the IRA owner die?
Who is the beneficiary?
That's easy. You only have two choices. It's either a spouse or a non-spouse. For this article we'll deal only with a non-spouse beneficiary, such as a child, grandchild, friend, ...anybody but a spouse. (I'll cover the rules for spouse beneficiaries in an upcoming column).
When did the IRA owner die?
Again, you only have two choices. I said this would be easy. The IRA owner died either before or after his Required Beginning Date (RBD), which is April 1 of the year following the year he turns 70-1/2.
If the IRA owner happens to die right on April 1, he is considered to have died on or after his RBD, and you would follow the rules as though he died after his RBD.
There are two distribution rules when the IRA owner dies before his RBD: the five-year rule and the life expectancy method.
 Under the five-year rule, the entire IRA account balance must be withdrawn by the end of the fifth year after the death of the IRA owner.
If the IRA owner dies in 2000, at age 68 (before his RBD), then under the five-year rule the entire IRA account balance must be distributed by Dec. 31, 2005.
There are no specific amounts that must be withdrawn during this five-year period, as long as the entire IRA is withdrawn by the end of the fifth year after death term.
This means that you can choose not to take any distributions in the first four years. Or you can take a distribution in year one and then take no distributions until year five. The five-year rule is the general rule, unless you elect out of it.
You would generally want to elect out of it so you, as an IRA beneficiary, can spread required distributions over many more than five years by using your life expectancy. The five-year rule is only applicable when the IRA owner dies before his RBD.
The five-year rule is also applicable if your IRA beneficiary is your spouse, but this would generally be a poor choice, since a spouse has much more favorable options with the spousal rollover. The five-year rule is applicable to any beneficiary, including a non-designated beneficiary, such as your estate or a charity.
Read Ed Slott's recent columns on the three most important decisions you'll make with your IRA: Choosing a beneficiary; picking a life expectancy and picking a distribution method.
If the IRA or qualified plan permits, and most do, you can elect out of the five-year rule in favor of the life expectancy rule, which will provide you with a much longer payout period, based on your life expectancy. If you choose the life expectancy option, you must take your first required distribution no later than Dec. 31 following the year of the IRA owner's death.
For example, if the IRA owner dies in August 2000, under the life expectancy option, the first required distribution must be taken by Dec. 31, 2001. If you miss this date, you lose the life expectancy option and default to the five-year rule.
This is a common and costly mistake. You elect the life expectancy method by taking your first required distribution by Dec. 31 of the year after the IRA owner's death. There is no other formal required election procedure.
Roth IRAs
All beneficiary distributions from Roth IRAs will follow the rules for IRA owners who die before their RBD, regardless of the IRA owner's age at death. Roth IRAs owners are not required to take mandatory distributions during their lifetime and neither are their spouses who inherit their IRAs.
Since there is no RBD for Roth IRA owners, every Roth IRA owner who dies is deemed to have died before his RBD. For example, if a Roth IRA owner dies at age 95, his non-spouse beneficiaries will follow the required distribution rules (stated above) for IRAs inherited from an IRA owner who died before his RBD, even though the Roth IRA owner died at age 95.
IRA Owner Dies After the RBD
When the IRA owner dies after the RBD, distributions have already begun and will continue under the same method that has been elected, unless the beneficiary is a spouse who elects to roll the IRA over or treat is as his or her own IRA.
For a non-spouse IRA beneficiary, required distributions must begin no later than the end of the year after the year of the IRA owner's death. There is no five-year rule (distribution option) when the IRA owner dies after his RBD. 
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