What do I need to state in this guaranteed signature letter?
Hi, today I received a letter from the investment company telling me that I need to send them a guaranteed signature letter of instruction telling them what I want to do with funds in one of my dad’s IRA account on which I am the beneficiary. I don’t think it’s a large amount of money but I don’t want to take a distribution at this time. So my question is, what language do I need to state in this letter to make sure the new account they set up for me doesn’t amount to a taxable distribution. I believe I read somewhere that my dad’s name still needs to appear on this account. Any help would be appreciated.
Thanks!!
Permalink Submitted by Alan Spross on Wed, 2007-08-08 20:08
There is no formal wording about the details of your request. It should just be clear and then take it to your bank to get a signature guarantee stamp next to your signature. There should be no charge for this.
As for the request, you will need to include a copy (possibly certified) of his death Cert if you have not already provided that. Your request should be to title the account “Kenpo, as beneficiary of Kenpo Sr”. Supply your SSN as distributions will be taxable to you. Also, request the addition of your own successor beneficiary(s) in case something happens to you, their address and SSN.
Note that you CANNOT rollover these funds to another IRA custodian, but you CAN move them by direct trustee transfer, should you desire to do so. Therefore, no check should be made out to you unless you recognize that it will be taxable.
If your father had several IRA accounts, you should find out from his tax records or tax person if there is any record of Form 8606 showing non deductible contributions. If so, the remaining amount of these at his death should be apportioned between all his IRA accounts, and beneficiaries will not be taxed on the pro rated amount of each distribution, so this is worth checking into. If you have some portion of this, you should file an 8606 to show the amount on your next tax return. If your father past his required beginning date and did not take his RMD for the year of death from one of his IRAs, the beneficiary’s should take the remainder of that RMD ASAP. Please advise if you have any other RMD related questions, and if so indicate his age at death.
Permalink Submitted by Stan McConnell on Thu, 2007-08-09 05:22
Thanks for the great reply. I actually received a letter today drafted by one of the investment guys that seems to meet all of the requirements. The one thing I am still unclear on is how distribution and taxation works. Am I correct in understanding that my dad’s investment company can create a beneficiary IRA account for me that I don’t have to take distributions on this right away? In other words I don’t have to take all the income this year, correct? BTW, my dad had not yet reached the age to start taking distributions from his account.
Thanks!!
Permalink Submitted by [email protected] on Thu, 2007-08-09 14:59
You are probably referring to a “Beneficiary (Inherited)” IRA. Yes you can open one there or anywhere you choose (with a trustee-to-trustee transfer), and then take the minimum (or more) each year. The first distribution (RMD) must come out by 12.31 in the year following death, unless you elect a five-year deferral, which is GENERALLY not advised.
Permalink Submitted by Stan McConnell on Wed, 2007-08-15 03:36
I just wanted to follow up with another question on this. I just got the word that this “Beneficiary IRA” has been created at my dad’s investment company and all the money is in this new account. I am awaiting the final paperwork to confirm this but I am wondering if it is still possible for me to do a “trustee to trustee transfer” to another investment company once get all of the information?
Secondly, how much control is allowed over a beneficiary IRA? In other words should I be able to control it like I control my 401(k) in that I can go in whenever I want and change how my money is invested?
Finally, how does the five year distribution work? Can I just manually withdraw as much as I want each year, keeping in mind the tax consequences, as long as I have it all withdrawn within five years?
Thanks!!
Permalink Submitted by Alan Spross on Wed, 2007-08-15 04:12
Yes, once the inherited IRA account is properly registered in your SSN and showing both your name as beneficiary of your father, you should be able to directly transfer the IRA to another IRA custodian who has set up an account with the same registration to receive the funds. You cannot roll over the funds, it MUST be done by direct transfer.
You have complete control over the investments in your beneficiary IRA account and the right to receive distributions of all or any amount in the account. However, there are potentially severe penalties if you do not take the RMD required. With respect to investment options, you need to choose an IRA custodian who offers what you want. Eg if you want to use low cost index funds you might consider Vanguard, if you want to make frequent trades then you would want a deep discount on line broker. I would not use a bank unless all you want is CDs in the account and perhaps lower yielding money market accounts.
With respect to the 5 year rule, you may or may not be subject to it. Would have to know if you were the named beneficiary or received the IRA through the estate. Also need to know your father’s age when he passed. IF you are subject to the 5 year rule, you have your choice on when to take distributions as long as the account is drained by 12/31 of the 5 th year following his death. One idea is to take an equal amount each year so your tax bracket is not increased. This depends on the total value of the IRA. Finally, you need to check to see if any of this would be tax free as I posted earlier.
It is possible that the current IRA agreement imposes a 5 year rule, but if you transfer it to another custodian who offers what the IRS allows, you might be able to stretch it over your life expectancy. This depends on the other information requested above. Please advise.
Permalink Submitted by Stan McConnell on Wed, 2007-08-15 05:28
Thanks again for the great answers.
In answer to your questions my dad was a few months shy of his 59th birthday. Also, this was not inherited from the estate but was passed directly to me as the beneficiary. Finally, I already took a distribution this year to pay for some of the expenses related to his passing so I know I will be taxed on that so I probably wouldn’t have to take much more next year.
Some other questions. In general when you have a Beneficiary IRA is it always kind of a big process to withdraw? Do I need a guaranteed signature letter every time I need to take a distribution?
Finally, and I know I probably should see a financial advisor, but what type of investments are usually best doing the five year distribution if I am looking for fairly low risk?
Permalink Submitted by Alan Spross on Wed, 2007-08-15 21:35
You should not be subject to the 5 year rule. While the current IRA agreement of this custodian may require the 5 year rule, that is relatively rare. But if true, you can still transfer the inherited IRA directly to another trustee who will allow you to establish your RMD over your own life expectancy. Now, if you plan on withdrawing the entire balance within the 5 year period (ending 12/31 of the 5th year following his death) anyway, then there may be sense transferring the account.
To summarize, have you checked the IRA agreement, which you should have and/or been told by the IRA custodian that the 5 year period does apply to you? If so, and if you want to maintain tax deferral while the account grows, you should consider a transfer.
There is another possiblity for this. Depending on WHEN your father died, you may have missed the deadline to elect life expectancy. Did he pass prior to 2006?
You should not have to go through the signature card presentation for each withdrawal. That should have been a one time requirement.
Let’s get through these issues before addressing investments since the type of investments held in this account should be based on how fast you will be draining the account.
Permalink Submitted by Stan McConnell on Thu, 2007-08-16 01:25
Well actually my father just passed about a month ago and part of the reason some of these issues came up so quickly is because my father didn’t have any life insurance so we were required to look to his IRA to pay for his final expenses. When we did this it was discovered that I was listed as beneficiary on some his IRA, which I did a distribution on to pay for his funeral, but it was unclear as to whether he had completely removed his ex-wife as beneficiary on all of his accounts. After the investment company did some research, with my attorney’s encouragement, they found paper work that indicated I was the beneficiary and they created a custodian account for me.
Now maybe I don’t need to move the money right now but I was a little frustrated with the way this company handled this whole situation. When my father passed I was being told different things by the investment company and the people in the field so it just worries me to leave this money with this company. Maybe this was an unusual situation because we needed access to some of these fund so quickly but it was not a situation I wanted to deal with when trying to deal with my loss.
Permalink Submitted by Alan Spross on Thu, 2007-08-16 01:54
Under the circumstances, you now have time to digest this some more. You also have another 16 months to transfer the account if you need to. I cannot fault the custodian for making totally sure who the beneficiary was or getting the signature guarantee, but you have to be the judge of how efficiently they communicated all this to you. The technical challenge now is to determine if the current IRA agreement requires you to accept the 5 year rule or not. If it does, that would be good cause to transfer the account unless you actually want to drain it by 12/31/2012.