Mike’s Key Points to Remember
The deceased IRA owners account needs to be retitled into an inherited IRA by September 30th of the year after the person passes away and the first distribution has to be taken by December 31st of the year after the original IRA owner passes away. The IRA custodian is required to automatically set up an inherited IRA for the non-spouse beneficiaries, which does give assurance that the inherited IRA is set up by the September 30th deadline.
However the IRA custodian is not required to contact the non-spouse heir to take out their first required taxable distribution by the deadline, which is December 31st of the year after the original IRA owner passes away. If the non-spouse heir fails to meet this deadline, they will subject themselves to a 50% penalty.
However the responsibility to re-title it into an inherited IRA account by the September 30th deadline is now that of the non-spouse heirs, and the corporation sponsoring the retirement plan is not required to contact heirs to let them know of this deadline.
If they miss the deadline and then subsequently fail to take their first distribution by December 31st of the year after the person passes away, then the non-spouse heirs are at the mercy of the corporation as far as how they are going to have to pull the money out, which often means they are going to have to cash it out in one year which could result in huge tax losses.