If you’ve inherited an IRA as a beneficiary, and there is real estate in the account, you may be wondering what your options are for choosing the best distribution strategy. The IRS imposes specialized distribution rules for Inherited IRAs, which can incorporate many different factors for the IRA owner to consider. This article will give inherited IRA owners a breakdown of the distribution rules for their Inherited IRA, and equip them with the knowledge they need to choose a distribution strategy that is best for them and their real estate assets.
First, it’s important to know that the Inherited IRA maintains the tax structure and advantages of the original account, whether it is a Roth or a Traditional IRA. If the beneficiary of the Inherited IRA is the spouse of the original account holder, then the account can be treated like the beneficiary’s regular Roth or Traditional IRA, without any unique distribution or contribution rules. However, if the beneficiary is a non-spouse, then the beneficiary A. cannot contribute any money into the Inherited IRA, and B. must adhere to special distribution rules for non-spouse Inherited IRAs.
In terms of distribution strategies for real estate, the beneficiary has several different options. The first depends on whether or not the property was secured with debt-leverage. The next depends on the account structure, and the tax-advantages that apply to that account.
If the Inherited IRA is a Roth IRA, then the money within the account was contributed post-tax, and the beneficiary doesn’t have to worry about paying taxes upon distribution of the account. If the Inherited IRA is a Traditional or any other non-Roth account type, the beneficiary will have to pay taxes upon distribution of the account. Both spouse and non-spouse Inherited IRA owners can take distributions in cash or in-kind, which retitling the real estate ownership to belong to the IRA owner his or herself.
Non-spouse beneficiaries have a few different distribution rules to follow based on the Inherited IRA account type. For an Inherited Roth IRA, the first distribution option is a five-year distribution rule, where no yearly required minimum distributions are necessary as long as the account is depleted by the end of the fifth calendar year following the year of the original IRA owner’s death. The second option is to make the balance of the Inherited IRA payable over the life expectancy of the designated beneficiary. These distributions must begin by the calendar year following the year of the original IRA owner’s death.
For a non-spouse beneficiary with any other Inherited IRA account type (non-Roth), the options are dependent on the time of death of the original IRA account holder. If the original IRA account owner passes before the required start date for qualified distributions, the beneficiary has two options. The first is the five-year distribution rule, which is the same for Roth IRAs. The second is also the same as Roth IRAs, which is to make the contents of the IRA payable over the life expectancy of the designated beneficiary. Distributions must begin by the end of the calendar year following the year that follows the original IRA owner’s death.
However, for a non-spouse non-Roth Inherited IRA, if the original IRA account owner dies on or after the required beginning date, the required minimum distributions are based on the longer of either the life expectancy of the designated beneficiary, or the original IRA account owner’s life expectancy. If the first is the longest, distributions must begin by the end of the calendar year following the year of the original IRA owner’s death.
If you have any questions about your options as a beneficiary of an Inherited IRA with real estate, feel free to call us at New Direction IRA at 303-546-7930, or send us an email. You can also visit our Inherited IRA Distribution page here.