To make the most of an IRA–whether your own or one you inherited–sometimes you need to keep an eye on the calendar. Five key deadlines can affect your ability to use various strategies. These are the deadlines to keep in mind.

1. April 1.

If you turned 70½ last year, you must take the first required minimum distribution from your traditional IRA by April 1 of this year. After that, you must take distributions by Dec. 31 of each year. The payout is based on the account balance on December 31 of the previous year divided by your expectancy, as listed in one of three different IRS tables (really) contained in Appendix C of IRS Publication 590, Individual Retirement Arrangements (IRAs),.  After doing the calculation the mandatory withdrawal is expressed as a dollar value. You are required to pay income tax on this amount.

The payout is based on the account balance on December 31 of the previous year divided by your expectancy, as listed in one of three different IRS tables (really) contained in Appendix C of IRS Publication 590, Individual Retirement Arrangements (IRAs),.  After doing the calculation the mandatory withdrawal is expressed as a dollar value. You are required to pay income tax on this amount.

You aren’t required to take yearly minimum distributions starting at age 70½ from a Roth, as you are from a traditional IRA, so the money can be preserved for your heirs, who after your death must take yearly tax-free distributions based on their own (presumably long) life expectancies. For more about converting a traditional IRA to a Roth, see my post, “Smart Moves For Battered IRAs.”

2. September 30.

This is often called the beneficiary designation date. The beneficiary form on file with the custodian of an IRA — not a will or living trust — controls who inherits it. For an IRA owner who died in 2011, you must know who the beneficiary is by September 30, 2012.

“Designated beneficiary” is a term defined in the Internal Revenue Code, with further elaboration in IRS regulations. It refers to people named to receive IRA assets when the account owner dies and to trusts that meet certain requirements.

Only a designated beneficiary can qualify for what’s called a stretch-out. The term does not denote a specific type of IRA, but rather a financial strategy to stretch out the life — and hence the tax advantages — of an IRA.

The term “stretch IRA” describes the strategy in which a spouse, child or grandchild inherits an IRA and then draws out distributions over his or her own life expectancy. The longer the life expectancy, the smaller — as a percentage of the IRA balance — each payout must be. This enables beneficiaries to enjoy decades of income-tax-deferred growth in a traditional IRA or tax-free growth in a Roth IRA.

This option is not available if an estate is named as beneficiary. (Put another way, an estate cannot be a “designated beneficiary.”)  If you’re dealing with a Roth IRA, all funds must be withdrawn within five years. For a traditional IRA the same rule applies unless the former owner was already 70 1/2 — the age at which a traditional IRA owner must begin cashing out. In that case the distribution rate for the heir is based on the age of the person who died.

If you are the only named beneficiary of an inherited IRA, you’re sitting pretty. Unless you’ve inherited from a spouse, you must retitle the IRA, including the original owner’s name and indicating it is inherited.

On the other hand, if you were one of multiple beneficiaries named to share the account, it may be necessary for you to take certain steps by September 30 to take advantage of the stretch-out. For example, if you are co-beneficiary with a trust that does not qualify as a designated beneficiary; or with a charity (which can’t qualify as the designated beneficiary), you will want to pay out their share. Otherwise, you would not be eligible for the stretch-out.

3. Nine months after the IRA owner’s death.

This is the date by which, under federal law, beneficiaries must decide whether or not to disclaim or decline an inheritance. Most often this is done because the person who would have otherwise inherited the assets wants to benefit another person or a specific charity (usually for tax reasons). People who disclaim, known as disclaimants, are generally treated as if they had died before the person from whom they are inheriting.

Non-IRA assets go to the person next in line as designated in a will or trust or under state law if the estate plan makes no such provision, or to a specific charity if that is what the estate plan specifies.

The process is different with an IRA because the beneficiary form controls who inherits the account. So if you disclaim an IRA, it will go to an alternate beneficiary, if there is one. For example, let’s say you name your spouse as primary and children as alternates or your children as primary and grandchildren as alternates. Your primary beneficiary then has the option of disclaiming the account, enabling it to pass to the younger alternate.

Keep in mind a potential wrinkle when you are one of multiple beneficiaries on the account. If, to comply with the disclaimer rules, you must disclaim before September 30.

4. October 15. 

This is a date to keep in mind if you converted a traditional IRA to a Roth — a maneuver in which you take money out of a pretax IRA, pay tax on it and plop it into a Roth, where it can grow tax free. If you want to leave retirement assets to family (and particularly to grandkids) a Roth conversion is one of the simplest, best planning tools available, as explained here. A Roth is also particularly useful if you are nearing 70 1/2 and want to invest in illiquid assets that aren’t easily distributed on an annual basis — a strategy described in my post, “How To Invest Your IRA In Real Estate, Gold And Alternative Assets.”

Of course, this assumes that assets will go up in value after you convert to a Roth and pay the associated tax. If they didn’t and you’re not prepared to wait things out, you may want to put things back the way they were. The process of undoing a Roth is called recharacterization. To do this you need to contact the financial institution that is the custodian of the account. It may be choked with similar requests as October 15 approaches, so don’t wait until the eleventh hour. If you have already filed your return and paid the tax, you will need to file an amended tax return to claim a refund.

Then keep this rule in mind: Once a conversion is undone, the same assets (or lump of money) cannot be converted again until the year following the original conversion or more than 30 days after the conversion was undone, whichever is later. In other words, if you undo the conversion on October 15, you can reconvert the same assets as soon as November 16; you can’t extend that deadline to the beneficiary designation date.

5. December 31.

Whether you have your own IRA or have received an IRA inheritance, December 31 is a key date. Here are the rules you need to know.

a. IRA Owners. You are considered the owner of an IRA that you set up and funded – either through annual contributions or the rollover of a 401(k). Unless the account is a Roth, you must take yearly minimum distributions starting at age 70 1/2. You have until April 1 of the year after you turn 70 ½ to take the first one. After that, you must take distributions by December 31 of each year.

b. Inherited IRAs. If they choose to, IRA inheritors can draw out these minimum required distributions over their own expected life spans. These are the IRA inheritance rules.

c. Non-spouses. Generally, non-spousal IRA heirs must withdraw a minimum amount each year, starting by December 31 of the year after the IRA owner died. Note: This is true whether it’s a traditional IRA or a Roth (a common misconception).

To calculate this distribution, you take the balance on December 31 of the previous year and divide it by the individual’s life expectancy, as listed in the IRS’ “Single Life Expectancy” table (see p. 88 of IRS Publication 590, Individual Retirement Arrangements (IRAs). Unless the account is a Roth, there is income tax on this required payout.

Don’t make the mistake, as some people do, of using the number from the table to figure a percentage. In subsequent years, you simply take the number you used in the first year and reduce it by one before doing the division.

What if there are co-beneficiaries on the account? Here too, the December 31 date is significant. Inheritors (or a parent, if they are minors) can ask the financial institution that holds the account to split it, giving each person the share he or she was entitled to under the beneficiary designation form.

Splitting the account avoids squabbles over investment strategies; it also allows beneficiaries to take distributions over their own life expectancy or, if they prefer, to cash out. The deadline for subdividing such an account is December 31 of the year following the year of the owner’s death. Watch this process carefully, because mistakes often occur when changing account names and moving assets.

When an individual and a charity are named as co-beneficiaries, there’s some disagreement about whether the December 31 deadline saves the stretch-out if you haven’t paid out the charity by September 30. Brooklyn, N.Y. CPA Barry C. Picker takes the position that if one fails to pay out the charity by September 30 in this situation “the ability to split the account by December 31 will save this for the individual beneficiary.” This is a gray area, though; to avoid bickering with the Internal Revenue Service, it’s best to cash out a charitable beneficiary by September 30.

d. Spouses.  Unlike other inheritors, who must begin making withdrawals by December 31 of the year following the account owner’s death, a spouse – let’s assume it’s the wife – who inherits an IRA has another option. She can roll the assets into her own IRA and postpone distributions from a traditional IRA until she turns 70 1/2.

The catch is that, like other IRA owners, she may have to pay a 10% early-withdrawal penalty if she takes money before age 59½ from her own IRA. So a young widow should generally wait until after reaching 59½ to do the rollover. Meanwhile, she doesn’t have to take out any money until her late spouse would have turned 70½.

by Deborah Jacobs, Forbes – Personal

Edited and posted by Harold Goedde CPA, CMA, Ph.D.