Recently we received a question that we thought might be worthwhile sharing with a broader audience: My client’s mother recently passed away at the age of 69 leaving behind a $400,000 IRA. The only beneficiary is her 31 year old daughter who wants to use a portion of the account as a down payment for a new home. The timing in uncertain given current real estate market. Can she use the 5-year rule to delay the required minimum distribution?

A quick answer is yes, but it may not be the best option. Here’s why.*

When an IRA owner dies before date on which require minimum distributions must begin (Required Beginning Date or RBD), a non-spouse IRA beneficiary has two distributions options: a five-year distribution method and a life expectancy method.

The five-year method requires the entire account to be distributed by December 31 of the fifth year following the year of the original IRA owner’s death. This rule is only available when the IRA owner dies prior to age 70 1/2. The life expectancy method allows a beneficiary to spread the required withdrawals over her life expectancy. Both spousal and non-spousal beneficiaries can use this approach.

That said, the only way to use this method is by making a pro-active election. Failure to elect the life expectancy method automatically evokes the five-year distribution rule. Making the life expectancy election requires that IRA beneficiary take her first required distribution by December 31 after the year of the IRA owner’s death. It is a good idea to document the life expectancy election in writing. While the IRS does not prescribe a specific way to document it, a letter attached to the first distribution request may be a good way to do it.

If your client intends to use only a portion of the IRA to finance the purchase of her home, she may benefit from taking the required minimum distributions using the life expectancy method and reserving them for the time when the down payment is needed. Assuming that the account owner died in 2015, the first RMD will be due by December 31, 2016. The factor used to determine the distribution in year one will be 51.4 (your client will be 32 at that time) resulting in a distribution of $7,782 (assuming that the account is still at $400,000 on Dec 31, 2015). The following year, the factor is determined by reducing the initial factor by 1, i.e. 50.4 and so on.  If more funds are needed at the time of home purchase, the beneficiary can take an additional distribution in the amount needed to get to the desired down payment.

This approach will allow your client to get the necessary funds on one hand and preserve the advantages of tax-deferred compounding for the remainder of her inherited account. Using the five-year approach, on the other hand, will require the entire balance to be distributed by the end of year five and your client will miss out on the potential benefits of stretching that account. She will fall into the proverbial five-year trap.

Remember, your client can always request a distribution in excess of the required minimum. The required minimum is just the minimum amount to be withdrawn every year. A beneficiary can always take more.

*This discussion is offered for illustration purposes only. Individuals are encouraged to seek advice of a properly-trained and licensed tax professional.