Inherited IRA mechanics

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  • #5334
    Bruce1950
    Participant

    Hello

    An inlaw recently passed away and I’ve been asked to provide assistance. I understand the concepts of IRA operations and inheritance, but not the fine details, so I’m wondering if someone can help me with these procedural questions.

    The decedent is a 75 year old widowed mother who died in February with 4 children named equally as her beneficiary designees on her Traditional IRA, with a current balance of $300,000. The RMD for this year is calculated at $13,000 that has not yet been withdrawn. Questions:

    1. Will the RMD be withdrawn and paid to the estate or will it be apportioned between the 4 designated beneficiaries?

    2. If the Estate, will the custodian issue the 1099-R to the estate and its up to the executor to issue a K-1 to each beneficiary for their 25%?

    3. If the individual beneficiaries receive 25% of the RMD, will the executor issue 1099-Rs to each?

    4. After the RMD has been distributed, must each beneficiary set up their own inherited IRA with the custodian, to which their 25% is transferred, then allowing them to do a direct transfer of their inherited IRA to the custodian of their choice? Or can each beneficiary first set up an empty inherited IRA at the custodian of their choice and have the existing custodian transfer their 25% directly to their newly formed inherited IRA?

    5. If the transfers from the mother’s IRA to the individual inherited IRAs is done on different dates, for the first transfer, will the custodian take the value of the TIRA at the point of transfer and multiply it by 25% and transfer that amount?

    6. If so and the second transfer is done two days later, will the custodian take the value of the mother’s TIRA on the day of transfer and multiply it by 33.33% and transfer that amount….with 50% being the multiplier on the final transfer?

    7. What form will the transfer be in? Will the custodian liquidate all investments and transfer cash or can the beneficiary request certain investments be transferred in-kind, such as shares of mutual funds or shares of stock?

    Thanks for the assistance

    BruceM

    #5336
    Alan S.
    Participant

    1) The 4 children are jointly responsible for completing the year of death RMD by 12/31/2020, therefore they do not have to participate equally. Often there is one beneficiary who plans to take a distribution large enough to complete the year of death RMD alone. But if there is any doubt regarding follow through, the next best solution is 25% each. The distribution can only be made to the beneficiaries, not the estate and this can only be done when the beneficiaries have established separate inherited IRA accounts. It does not have to be done before any beneficiary does a direct transfer to a new inherited IRA custodian either.

    2) Yes, but this only happens when the estate is the named or default beneficiary. In your case, individuals were named directly, so the estate will not have any authority and cannot receive a distribution. The executor therefore has no direct authority, but might provide general advice and coordination services.

    3) Again, the individuals will receive direct distributions and will receive their 1099R directly from the inherited IRA custodian.

    4) As stated above, each beneficiary should establish their separate inherited IRA with current firm. They can then request a distribution from that firm before a transfer out, or wait and request it from the new custodian.

    5) 6) Yes, 25% of account to the first inherited IRA, 33.33% of what is left to the second inherited IRA, then 50% of what is left to the third.

    7) Probably depends on the custodian. They don’t want to get into a complex breakdown of several different securities.

    8) Of course, the beneficiaries no longer face annual RMDs under the 10 year rule, but they will need to have a plan to prevent a large taxable distribution if they wait until the end of the 10 year period. Any beneficiary that qualifies as an “eligible DB” can still stretch, and they need to be sure to create a separate inherited IRA no later than 12/31/2021 to protect that stretch.

    #5338
    Bruce1950
    Participant

    Alan. Got it, thanks. However you said at the end of #1. My understanding is any RMD to the deceased owner not yet withdrawn must be withdrawn BEFORE any transfers to inherited IRAs is allowed. Would you agree?

    #5341
    Alan S.
    Participant

    Bruce, no. The transfer can be done first. IRA transfers are not distributions and therefore are not limited by any RMD requirements. However, this does not apply to qualified plans since movement to an inherited IRA is a reported direct rollover which is treated as a distribution. With a distribution the RMD must be completed first and if it isn’t part of the direct rollover equal to the RMD must be reported as a taxable distribution and removed from the inherited IRA.

    Another factor with respect to IRAs is the IRA RMD aggregation rules. In the case of the 75 year old decedent, he might have completed his year of death RMD from any other IRA he might have owned, so the custodian of this particular IRA has no idea if that RMD was completed unless they are told by the beneficiary. The custodian cannot force out that RMD like a 401k administrator can. And all the IRS cares about is that (any) beneficiary completes the year of death RMD by the end of the year from any inherited IRA account, although in many cases it is not completed until the following year. In that case the beneficiary must file a 5329 to request the penalty waiver.

    #7228
    Lewis-H
    Participant

    You transfer the assets into an Inherited IRA held in your name. At any time up until 12/31 of the fifth year after the year in which the account holder died, at which point all assets need to be fully distributed. You are taxed on each distribution. You will not incur the 10% early withdrawal penalty.

    #7233
    Bruce1950
    Participant

    Alan
    Sorry for the delayed feedback, but thanks very much for the info. Very helpful.

    BruceM

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