A recent article looked at rules concerning the inheritance of a TSP account. This article will cover the rules on inherited IRAs. Individual Retirement Arrangements, like the Thrift Savings Plan, pass by beneficiary form; the IRA custodian will pay no attention to wishes you express in a will or a trust. If you were to die without having completed a beneficiary form, the law of intestacy of the state that was your legal residence at the time of your death would govern who inherited your IRA. Though laws of intestacy vary, it is common that they would go in this order: 1) surviving spouse; 2) surviving children; 3) parents, if living; 4) siblings; and so on down the line.
The individual who is the sole named beneficiary will have several choices and the choices have different implications for spousal and non-spousal beneficiaries.
One option is for the sole named beneficiary is to establish an inherited IRA. Such an IRA would remain in the name of the deceased, but would be FBO (for the benefit of) the beneficiary. A spousal beneficiary would have to begin taking required minimum distributions (regardless of their age) by December 31 of the year that followed the year of the original account holders death if the original account holder was 70 ½ or older at death. However, if the original account holder had not yet reached 70 ½, the spousal beneficiary does not have to begin RMDs until their deceased spouse would have turned 70 ½. Once they begin their own RMDs, surviving spouses can use either their own life expectancy or that of their deceased spouse. If the named beneficiary is a non-spouse, they will be required to begin RMDs by December 31 of the year that followed the original account holder’s death, regardless of the original account holder’s age at the time of death.
See also, TSP Spouse and Survivor Rights at ask.FEDweek.com
Another option is to distribute all of the IRA within five years of the original account holder’s death. If there are multiple beneficiaries, this might be the easiest method, though it is the least tax efficient. Regardless of the age of the beneficiaries, there will be no early withdrawal penalty assessed.
A surviving spouse could also do a rollover (either direct or 60-day) into their own IRA. They could roll the IRA of their decease spouse into an IRA they already have, or they can establish a new IRA.
If the inherited IRA is a Roth, the beneficiary needs to be aware that an inherited Roth IRA requires that minimum distributions be taken. Original owners do not have to take RMDs from Roth IRAs.
Note that I used the phrase “named beneficiary” several times above. If a beneficiary is not named, or if the IRA is left to the “estate”, the ability to stretch the IRA over the beneficiaries’ lifetimes is gone and the IRA will have to be cashed out in the above mentioned five year period.