What Is The 5 Year Rule?

If your traditional IRA beneficiary is a non-person such as your estate, a non-qualified trust or your favorite charity, you may be told that the “5-year rule” may apply when you pass away. But what does that mean exactly?

Assume you pass away when you are 62 years old, before your IRA required beginning date (age 70½). Also assume your estate was named as the beneficiary of your IRA (generally a bad idea but that’s a whole other topic!). Under these circumstances, the 5-year rule applies.

According to IRS Publication 590-B, your IRA is required to be fully distributed by the 5th anniversary of your death. To illustrate, if you die in 2018, the 5-year rule requires that your IRA be fully distributed to your estate by December 31, 2023.

The 5-year rule is an option if you die prior to your required beginning date (age 70½) and you have a designated beneficiary such as your spouse, child, best friend or a qualified trust.

Under the 5-year rule, you don’t have to take an RMD each year if you don’t want to. You can take as many or as few distributions from the inherited IRA at any time and in any year as long as the inherited IRA is fully distributed by the deadline.

The 5-year rule is never available if the owner dies on or after his/her required beginning date.

Source: www.irs.gov www.irs.gov


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