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A Final Retirement Account Distribution Must Still Be Made After Death

old man discussing retirement with lawyer

The concept of the “half-birthday” is not something most of us think about after childhood. You do not find many adults saying, “I am 56 and a half.”

However, if you have a non-Roth individual retirement account (IRA) or 401(k), there is an age you’ll want to keep track of: 70 ½.

According to federal law, beginning on April 1 of the year after you reach that age, you must start withdrawing a minimum amount from these retirement accounts. These withdrawals are known as required minimum distributions (RMDs).

But what happens if you die after reaching this age but before all the account funds have been distributed? Under the law, your heirs must take the final RMD before taking control of the account.

The government created rules for RMDS to encourage people to save for retirement and allow tax-free assets to build up as people worked.

However, Congress added provisions to this legislation so the money would not simply accrue tax free forever. The funds you withdraw are considered taxable income for the year in which you withdraw them. If you do not take RMDs and pay taxes on them, you will face a 50 percent penalty.

The rules for inheriting an IRA differ depending on whether you are a spouse or not, but either way, the heir must take the RMD for the year in which the account owner died by the end of that year.

To take the RMD, beneficiaries need to contact the account’s custodian and submit the account holder’s death certificate. But if the account owner died before they were required to begin making withdrawals, their heirs don’t need to take an RMD.

The money from the RMD will go directly to beneficiary on the account instead of the estate, meaning it will be taxable income for the beneficiary. If there is more than one beneficiary, this money will be evenly distributed.

Do you have questions about your loved one’s estate? Are you concerned that you will be leaving your heirs with a financial headache after you die? Gummer Elder Law can help. Contact us today to learn how we can help you prepare your estate.