March 31, 2021 at 3:03 pm #18972
If a sibling less than 10 years younger inherits a Roth IRA they have the option of lifetime RMDs or the 5 year rule. I recently was told by a friend that the RIRA he inherited from his deceased brother had to be distributed within 5 years, per the IRA custodian. If this is true, does this mean the IRA custodian can choose the minimum withdrawal option for the inheritor?
If so, couldn’t the inheritor simply transfer the inherited IRA to another custodian that allows the lifetime withdrawal option?
BruceMApril 1, 2021 at 10:20 pm #19654Alan S.Participant
Bruce, the Secure Act eliminated the 5 year rule other than for non DB beneficiaries for deaths prior to RBD. I doubt that a particular custodian would restrict the distribution period to 5 years on their own, so perhaps the friend inherited through decedent’s estate or NQ trust.
Another possibility is that brother’s Roth was already inherited under the prior 5 year rule provisions. Probably more likely is some confusion on what the person was told.April 8, 2021 at 9:27 pm #20748
I had him recheck and the custodian did say 5 years. So either the custodian is confused/has not updated their system yet or they know the new rule but are using their own 5 year rule??
My suggestion to him is to transfer it out of there to another custodian.
BruceMApril 9, 2021 at 1:40 am #20763Alan S.Participant
Bruce, I just reviewed the new 2020 Pub 590 B. It seems like the IRS has continued some pre Secure options that the Secure Act text disallowed.
One of those happens to be the option for the eligible designated beneficiary of decedent passing PRIOR to RBD to opt out of the life expectancy stretch into the 10 year rule or even into the 5 year rule (see p 11). But it seems unlikely that the custodian’s agreement would be so restrictive that they would not recognize anything but the 5 year rule.
The agreement itself should be reviewed, and since the IRS just released the 590 B, it is unlikely that any custodian could have already incorporated this into a new agreement. Actually, prior to Secure, I cannot recall hearing of any custodians requiring the 5 year rule for designated beneficiaries. That would pretty much ruin their IRA business.
To your original question, if this custodian’s beneficiary provisions are this restrictive and the 5 year rule did apply for the present custodian, there are no RMDs due until year 5. Therefore, the beneficiary should be able to do a direct transfer to a new custodian before the deadline to make the life expectancy election at the first custodian.April 11, 2021 at 4:02 pm #21049
Yes, I agree. This is a small custodian I’ve never heard of, and so may be lagging on their updates. And I agree that it wouldn’t make sense for the custodian to push money out of the IRA sooner than later if they have the option.
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