Withdraw from an Inherited IRA or Retirement Plan Using the Life Expectancy Method

What is it?

The life expectancy method is a method of taking distributions from an inherited IRA or employer-sponsored retirement plan account. As the name suggests, it allows you to take post-death distributions based on your life expectancy. Under this method, you must receive a certain minimum amount each year. You can always take larger distributions than required, but if you withdraw less than required in any year, a 50 percent federal penalty tax will apply to the undistributed required amount. The annual required distributions are calculated to dispose of the entire balance in the inherited IRA or plan over your remaining life expectancy. The applicable life expectancy is determined according to IRS life expectancy tables.

The main advantage of the life expectancy method is that it typically allows distributions to be taken over a period of many years. In fact, in many cases, this method will result in the longest possible payout period for post-death distributions. As discussed below, a longer payout period can provide significant income tax advantages. Obviously, younger beneficiaries will benefit the most from the life expectancy method because their post-death payout periods will reflect their longer life expectancies.

Caution: If an IRA owner or plan participant dies after his or her required beginning date, and there is no designated beneficiary, distributions are generally based on the owner's or participant's remaining life expectancy (calculated in the year of death).

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