Beneficiary IRA – Do we actually have one?
My wife was left an IRA when her father passed away 9 years ago. He had an IRA, which he cashed in prior to his death. He then bought individual IRA’s for both his kids. The statements list them as Beneficiary IRA’s – but we are getting conflicting information about this from our new Financial Advisor and the Advisor of the current IRA. Our new advisor states we are/have been required to make minimum distributions. We have never taken a distribution (other than first time home buyers) a few years ago. The origianal advisor states we CAN NOT take distributions. So now we are very confused. This IRA was opened with 30k +, we were told benificiary IRAs had a limit of 5K. Is this truley a Ben. IRA? We were going to transfer the IRA to our new advisor – but he is going to place into a Ben.IRA – which we know we will then be required to make distributions. Any guidance is greatly appreciated.
Permalink Submitted by Alan Spross on Sat, 2008-12-06 18:01
I think there is a misunderstanding regarding the past history of his IRA. A beneficiary IRA is one that is inherited at the death of the owner, not an account that can be opened while the original owner is still alive. My guess is that nothing was cashed in by her father, but possibly he split his IRA into two accounts, each naming a different child as beneficiary. If these IRA accounts are now titled in beneficiary form as they should be, someone had to take care of that at some point after his death.
There are and have been RMD requirements for non spouse beneficiaries, but the RMD depends on her father’s age at his death. Was it before or after his required beginning date? That date is April 1st of the year following the year he turned 70.5 or would have.
Any beneficiary can take a distribution when they want to, so the original advisor’s comment needs to be explained. Since the current IRA is already in beneficiary form, apparently with an RMD requirement that was overlooked, it is likely that major distributions will need to be taken, and if he passed prior to the above date, the entire balance needs to be distributed and Form 5329 needs to be filed with her tax return requesting that the 50% excess accumulation penalty be excused.
The IRA agreement itself needs to be reviewed regarding the RMD provisions that applied on the date of her father’s death. He died under the PRIOR rules, which changed in 2002.
The new advisor appears to be the much better choice, as the former one may have made a serious error, and now may be trying to cover it up, unless the facts are much different than what you posted. Since your wife apparently is the beneficial owner of one of the IRAs, she should be able to get direct information from the IRA custodian as to what happened. That may also help her decide on the merits of the original advisor.
Permalink Submitted by David Gunter on Sat, 2008-12-06 18:32
Thank you very much Alan. Let me clarify a few things. Her father passed before he was 60. I think I mis-spoke when i said he cashed his existing IRA. In fact – He cashed a Life Insurance Policy he had – and opened two IRA’s – one for each of his children. The original amount invested was over 30k in each IRA. All of this happened before his death. The custodian of the IRA has changed hands many times since then – but the Fin. Advisor has not. She has never informed us we needed to take Distributions. We were under the impression we could not take them (without big penalty). It was not until recently, when we hired a new Fin. Advisor for our family, that this issue came up. The original Advisor now states it is listed incorrectly – but she has yet to fix it. That is where all the confusion for us comes in. I understand if it is in fact a Ben. IRA – that distributions are required – but we are unsure if it is. My new Advisor has yet been able to get the original advisor to return his calls, so my wife will be calling her (original advisor) to try to set up a conference call. I really appreciate your help in this matter. It is really important we straighten this out, as my wife’s brother will be in the same situation as we are now in.
Permalink Submitted by Alan Spross on Sat, 2008-12-06 19:30
If he did what you indicated, the situation is considerably worse. A regular IRA contribution can only be made out of earned income of the owner, and is limited to much lower limits. Prior to 2002, the maximum regular contribution to an IRA was only $2,000. No telling what the IRA custodian was told, but a rollover contribution (as opposed to a regular contribution) is unlimited but must come from another retirement account, definitely not a life insurance policy or annuity.
You are correct that the actual status of these IRAs must be determined prior to considering further action. The IRA custodian should identify how these accounts were opened and what SSN was on them. If they were considered permissible rollovers while knowing the source was a life policy, there may be some leverage to seek some relief from the custodian, but that will be a tough sell with a 9 year delay. Determining the SSN on the original IRAs plus the exact registration should be useful in determining how they were set up.
There is no way to unwind a mess like this without going back and identifying when and where the first error was made. Please provide further info as you get it. Since you did not mention it, I will assume that there has been no inquiries about this from the IRS over this period.
Permalink Submitted by David Gunter on Sat, 2008-12-06 19:54
You are correct – we have never heard anything from the IRS regarding this. Reading over one of the IRA Statements – it states that this account is not reported to the IRS. I am not quite sure why, or what that means, but I asked my advisor this today, and he is going to look into this.
I think I will know a lot more once we are able to reach the original advisor who set these accounts up in the first place. Everything you have stated seems right on with what my new advisor has stated – but each time we try to contact the original advisor, she says something that is totally opposite from what my current advisor is stating. I believe the confusion is with how the IRA is listed. Hopefullyl, we won’t end up having to take the full distribution (since it has been more than 5 years) with a 50% tax/penalty. Thank you again for your insight.