The next pitfall has to do with meeting a deadline. A properly titled account must be set up by Dec. 31 of the year following the date of death of the account holder. Remember, nonspouse beneficiaries can't transfer the funds to their own IRA accounts, so they must establish an inherited IRA account that lists the name of the deceased. If the account is established after the Dec. 31 deadline, the beneficiary will no longer have the ability to stretch the IRA, and again, funds will have to be distributed based on the five-year rule. Finally, RMDs must be taken on schedule. If the original IRA account holder dies after age 70½, their RMD must be withdrawn for the year of the owner's death if it had not already been withdrawn. In addition, once a beneficiary chooses the stretch option, failure to take the scheduled annual RMD could result in the five-year rule being applied and the stretch option no longer being applicable. Missing an RMD can prove costly and may result in a 50 percent tax on the portion of the RMD not taken. RMD worksheets are available at the irs.gov website. You can also check IRS publication 590 to ensure that you are taking out the proper amount. While Roth IRA account holders aren't subject to RMDs, beneficiaries of Roth IRA accounts are required to take annual tax-free distributions. As you can see, while a stretch IRA can provide substantial financial benefits for beneficiaries, there are also many complexities and challenges. Since everyone's situation is unique, ask your tax and legal advisers to help you determine the most appropriate strategy for you.
Kurt J. Rossi, MBA, is a Certified Financial Planner Practitioner. He can be reached for questions at (732) 280-7550 and kurt.rossi@Independentwm.com. LPL Financial Member FINRA/SIPC.