If you are the designated beneficiary of an IRA account at Preferred Trust and you have recently inherited the account, please contact us at 702-990-7892 opt. 2 and be prepared to provide certain documents for verification, such as the death certificate and a copy of a government issued Photo ID. The statements below have been compiled from various IRS publications to help you identify the information that will be pertinent in determining the next steps for the inherited IRA account(s). For more information, please visit www.irs.gov.

Given the complexity and the frequent revision (i.e. new mandates or emergency relief provisions) of the Federal rules and regulations regarding Inherited IRAs, we highly recommend that you seek the advice of a legal advisor or tax professional when deciding the best course of action for your Inherited IRA. Failure to execute a distribution on time (depending on your situation) or making a miscalculation of the distribution could result in IRS penalties (50% penalty for any undistributed amount).

Beneficiaries of Inherited IRAs from account owners that were deceased prior to January 1^st, 2020 are NOT subject to the rules and regulations established with the passage of the SECURE Act effective January 1^st, 2020.

If you are the spouse of the original account owner:

You have the option to treat the account as your own by transferring the assets to your own Qualified Retirement account. You also have the option to treat yourself as the beneficiary rather than the owner of the account and use the Life Expectancy Method or the 5-Year Method for distribution of the account. Important Note: Your options may be affected if there are multiple beneficiaries.

If you are not the spouse of the account owner:

You have the option to use the Life Expectancy Method or the 5-Year Method to calculate a distribution for the account. Important Note: Your options may be affected if there are multiple beneficiaries.

• Life Expectancy Method: Required Minimum Distributions (RMDs) are mandatory and the date in which they must begin is dependent on the age in which the account owner died. There are certain tables that the IRS has established that are used to calculate the amount of your RMD.
• 5-Year Method: All assets MUST be fully distributed by December 31^st of the fifth year after the year in which the account holder died.

Beneficiaries of Inherited IRAs from account owners that are deceased after January 1^st, 2020 are subject to the new IRS regulations established with the passage of the SECURE Act effective January 1^st, 2020.

The SECURE Act – What it means for beneficiaries:

The SECURE Act differentiates between “eligible” and “not eligible” designated beneficiaries, essentially modifying the options available to “not eligible” beneficiaries.

“Eligible” beneficiaries include:

1. Surviving spouses
2. Minor children of the deceased (until they reach the age of majority*)
3. Disabled Individuals¹
4. Chronically ill individuals²
5. Individuals not more than 10 years younger than the deceased

The options for the account have not changed (refer to “The account owner was deceased prior to January 1^st, 2020” tab). Your strategy may depend on your relationship to the account holder, the type IRA account, and if there are multiple beneficiaries. For more information, please visit www.irs.gov.

*Once minor children reach the age of majority, “not eligible” beneficiary rules apply.
¹In order to qualify, the condition must be pre-existing upon death of original beneficiary.
² In order to qualify, the condition must be pre-existing upon death of original beneficiary.

“Not Eligible” beneficiaries include:

1. Everyone else not listed in the “eligible” beneficiary category

There is only one option for the inherited IRA, and that is to distribute the assets within 10 years. Your strategy may depend on what type of account the IRA is and if there are multiple beneficiaries. For more information, please visit www.irs.gov.

Contributions to this account type were tax deferred. This means that any distributions from the account will be taxed based on your income tax bracket. It is important to note that depending on your income level and the amount of the distribution, you may move into a higher tax bracket.

Was the account owner under the age of 73?

The IRS requires that owners of this type of account must begin taking distributions when they reach age 73. When you inherit the IRA, the age of the account owner will affect if and when you are required to take minimum distributions.

Contributions to ROTH IRAs are post-tax. This means that distributions from the account will be tax free, although there is an exception (see below).

The account was not held for 5 or more tax years.

The IRS established the 5-year rule for Roth IRAs specifically because of its tax-free distribution status. If the inherited account had not been held for 5 or more tax years prior to the death of the account owner, then distributions you make of the earnings from the account will be subject to tax. Once the 5-year hold period has been met, all distributions will be tax-free.

This will affect the options that you have for the account and the distribution of the assets of the account. You will only be able to hold the assets in an account with a company that can custody alternative assets, like Preferred Trust Company.

These options are available to you regardless of your relationship to the account owner. Important Note: Your options may be affected if there are multiple beneficiaries.

Disclaim the account:

Anyone can disclaim or not accept the retirement account, allowing the assets to pass to an alternate beneficiary named by the original account owner (if there is one).

Lump sum distribution:

If the account is in a cash position (has no investments) then you can distribute the entirety of the account without incurring the 10% early withdrawal penalty. However, if there are active investments, this option may be more difficult to execute seeing as many alternative investments are not readily liquid. Please note that this does not defer applicable taxes on the distribution if there are any.

The IRS treats the inherited IRA as your own, so if you decide to distribute assets from the account the 10% early withdrawal penalty may apply. There are certain exceptions to this rule, including for “non-eligible” beneficiaries who must distribute the entirety of the account within 10 years (open tab “The original account holder passed away after December 31^st, 2020” under “The SECURE Act – What it means for beneficiaries”).

If you decide to take distributions from the account, you will not incur early withdrawal penalties. Please keep in mind that this does not refer to potential taxes on the distributions depending on the account type.

The IRS determines your marital status as of January 1^st of each year, which means the former spouse remains a beneficiary for the entire year even if they become divorced from the original account owner. If the original account owner happens to divorce and pass away within the same year and they failed to change the beneficiary designation prior to their death, then the former spouse would inherit the IRA. However, if the original account owner changed the beneficiary designation in the same year of the divorce, then the former spouse will not be considered the sole beneficiary for that year.

You can and should designate a beneficiary for the account that you have inherited.

Links to various IRS publications and sources:

• Publication 590-B
• Retirement Topics – Beneficiary