Inherited IRA from dec. husb. – withdrawal, RMD’s & roll

❓ I have a client (50) whose husband (60) died in August. She was the primary beneficiary on his IRA, which is made up of a combination of mutual funds, common stocks and a money market account. Her broker succeeded in transferring the IRA into her name, but informed her that she could not get money out of it without incurring tax penalties. That doesn’t sound right to me, but I figured I’d poll the experts.

* Is she able to take some money out without incurring the 10% penalty?
* Would the tax treatment differ depending on which part of the portfolio she takes money out of (i.e. stocks vs. money market)?
* When does she need to start taking RMD’s?
* And is this an account that can be transferred from one company to another now that it’s been handed over? If it can be rolled over to another company, would a direct transfer be possible? Or will she face unique tax complications when selling the stocks?



It was not a good idea for her to assume the IRA as her own, because she now faces 9 years of early withdrawal penalties unless she establishes a 72t plan that must last until she is 59.5. The IRA should have been re registered in beneficiary form, and she could then have taken whatever distributions she needed. There would be no RMDs required of her for 10 years, when her husband would have reached age 70.5. By then she would be 59.5 and could then assume the IRA as her own.

It does not matter which investments fund withdrawals from the IRA, the distribution will be subject to both tax and penalty unless she sets up a 72t (SEPP plan). These have very rigid requirements.

Since the IRA was evidently put in her name, she does not have to take RMDs until she is 70.5. Because of the above situation, it would be wise at this time to verify whether the account was in fact put in her name OR just re registered in beneficiary status. I have assumed it is in her name only because she was warned about the early withdrawal penalty.

The IRA is now hers and she can transfer it to whichever IRA custodian she chooses. Best to do this by transfer rather than rollover. If certain proprietary investments are in the IRA that a new custodian does not maintain a market for, they would have to be sold and converted to cash prior to the transfer. A copy of the statement can be reviewed by a potential new IRA custodian who can then determine if there are any problems with accepting the current positions in the account.

Since a 72t plan will evidently be needed, be sure to become fully informed on the constraints of these plans. If the plan is not adhered to exactly per IRS requirements, retroactive penalties and interest will be owed back to Day 1 of the plan. A good cite to learn about these plans is 72tonthenet per link:
http://72t.net/Default.aspx



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