Beneficiaries: Avoid IRS Penalties

If you are the beneficiary of an Individual Retirement Account (IRA) you should be alert to possible penalties that could be inflicted by the Internal Revenue Service (IRS). For example, if you are an IRA beneficiary and decide to use the Life Expectancy method for distribution of your share of the assets, your distributions must begin no later than December 31 of the year following the death of the IRA participant. If the full portion of the money due to you as of this date is not distributed to you, then you will be subject to what the IRS calls an “excess accumulation penalty.” This is quite punitive, amounting to a full 50 percent of the distribution amount. But you do have an important money-saving remedy. The penalty will be waived if the total amount of all the money due you is distributed to you by the fifth year following the death of your benefactor, in other words by using the Five Year Rule.