Question about Inhereted IRAs and MRDs
My IRA benifeciers are my four immediately family members: 1) 1/2 to my 56 year old wife, 2) 1/6 to my 29 year old son, 3) 1/6 to my 26 year old daughter and 4) 1/6 to my 26 year old daughter (yes twins).
I am a “retired” 63 old and have never made a withdrawal from my rollover traditional IRA. Me and my wife are able to live off my social security, my defined benefit pension (she has 100% surviving spouce to my pension for her lifetime) and her salary. She plans to work another 4 years or until age 60 when I will be 67.
I rolled over my company 401k to a traditional IRA with TDAmeritrade when I retired from my company in 2005. One of the reasons I rolled over my 401k upon retiring from my company in 2005 was that the company IRA rules would have “lump summed” the balance of my 401k to my beneficiers upon my death. This would have resulted in a significant tax event for my surviors in the year of my death and would have not be very “tax efficent”.
Additonally I have actively managed my 401k and IRA and average an annual return of 10% with my best year ever being a 64% return in 2002. One reason I haven’t made any withdrawals is I really enjoyed the benefit of 10% compounding in a tax defered account.
So the question finally, what instructions should I leave for my suvivors as to how to deal with their portion of my significant IRA? How do they structure it? I assume TDAmeritrade will give them the options available to them. Does anyone have the details on how TDAmeritrade will deal with and IRA holders death?
Please details any pitfalls for them to avoid.
And thanks Alan in advnace as I am sure you will answer this question.
Seattle Sun
Permalink Submitted by Bruce Steiner on Thu, 2010-12-30 14:06
I would suggest that they consult with competent tax/estates counsel, who will advise them as to their choices (as well as the other aspects of the estate administration).
Permalink Submitted by Alan Spross on Thu, 2010-12-30 16:34
As Bruce Steiner indicated, since you will probably be around for a couple more decades, they need to assess their situation in view of changes to the tax law and their own various situations when the time arrives with appropriate professionals.
However, in the event they inherited very soon, here are some current considerations:
1) Your surviving spouse would not roll her share over to her own IRA until she reached 59.5 so she could tap the inherited IRA penalty free. But since she is NOT the sole designated beneficiary of your IRA, she would have to take annual RMDs until she did roll it over. Accordingly, if she was positive she would not need any funds from the IRA before 59.5, she could roll her share over earlier to eliminate the RMDs.
2) Children – they would need to create separate inherited IRA accounts by the end of the year following the year of your death in order to be able to use their own life expectancies for their RMDs, which would have to begin in the year following your death. They can ONLY create these accounts or change custodians by direct transfer, so it is critical that they know they cannot receive a check made out to them and roll it over indirectly to another inherited IRA account. They also cannot convert to an inherited Roth at this time. They need to name their own successor beneficiaries ASAP and determine if you had any basis in your IRA because they would inherit their share of unrecovered basis. Changes should be made now IF any of the children are special needs candidates. If you passed after your RBD, all beneficiaries must combine to take out the RMD for your year of death if this had not been completed.
The IRA custodian at the time will have their own procedures to follow in setting up the appropriate accounts for each beneficiary. Until they are provided with a death Cert and forms they require to be completed they will not distribute any funds, but usually this goes smoothly. If one beneficiary was inefficient in getting the forms completed, it would not restrict the others from setting up their own separate accounts. Depending on the investments held at the time, some may have to be sold if they wish to change custodians.
It helps if you make all parties aware of these current basic rules so they are informed and have something to fall back on in the event they end up with dealing with people that are not well versed on these matters at the time.
If you are concerned about creditors of your beneficiaries including spouses, perhaps you should consult an attorney regarding leaving certain of their shares to a trust instead of outright. Again, these guidelines are based on current laws and things can change in 20 years.
Permalink Submitted by Richard Rea on Mon, 2011-01-03 00:00
Bruce says: “I would suggest that they consult with competent tax/estates counsel…”
The key word here IMO is “competent” and that has been difficult for me to find.
When I first retired (2005) and wanted to get out of the management of my investments I choose to contact an advisor near me from the list in the back of Ed Slott’s “Parlay your IRA into a Family Fortune. I will refrain from post his name/address.
Any way this guy tried to direct me into and investment strategy that would have yielded him and others significant commissions and would have resulted in my IRA being cut in half in the Panic of 2008. I fled his office like he was carrying the plague.
I would consider driving down to Arizona to talk to Alan.
SeattleSun
Permalink Submitted by Richard Rea on Mon, 2011-01-03 00:28
Alan says, “1) Your surviving spouse would not roll her share over to her own IRA until she reached 59.5 so she could tap the inherited IRA penalty free. But since she is NOT the sole designated beneficiary of your IRA, she would have to take annual RMDs until she did roll it over. Accordingly, if she was positive she would not need any funds from the IRA before 59.5, she could roll her share over earlier to eliminate the RMDs.”
OK it appears the “surviving spouse” and the “children” are treated differently?
Implied by your response: The surviving spouse can just keep the deceesed spouse’s account open even though they are dead? Wow that amazies me that a dead person can still have an IRA?
Once the spouces dies before he reached 70.5 there is still a requirement to take a RMD by the surviving spouse?
I guess we can break this down into a series of possible senerios?
A) Currently I am 63 and my spouse is 56 so what is the situation if I die before she reaches 59.5 on June 19th, 2014. [Her DOB is Dec 19th 1954 just in case you want to check my math]
B) What is the situation if I died after she reaches 59.5 on June 10, 2014 and before I reach 70.5 on Oct 30th, 2017. [My DOB is April 30th, 1947]
Thats enough senerios lets just keep it that simple. And you assumption that I know anything about how IRAs are inhereted is probably incorrect. Is there a primer on this stuff somewhere?
Permalink Submitted by Richard Rea on Mon, 2011-01-03 00:46
OK I have read this about 25 times and it is strating to make some sense to me finally.
“1) Your surviving spouse would not roll her share over to her own IRA until she reached 59.5 so she could tap the inherited IRA penalty free. But since she is NOT the sole designated beneficiary of your IRA, she would have to take annual RMDs until she did roll it over. Accordingly, if she was positive she would not need any funds from the IRA before 59.5, she could roll her share over earlier to eliminate the RMDs.”
First of all we are talking about a “direct transfer” yes?
I am not sure she will need to “tap” the IRA if I die before she reaches 59.5 as she intends to work until at least 60 and we own our house, cars, etc. ie no debt. My biggest annual expense is property taxes (~$5,000) and utilities. So therefore she could “move” money to an “inhereted IRA” or “own IRA” and not be subject to penalties as she would not take any money out until after 59.5 Does she “move” the money into here own existing IRA or does another one get opened with some funky title on it; like “my dead husband rollover IRA”?
“if she was positive she would not need any funds from the IRA before 59.5, she could roll her share over earlier to eliminate the RMDs.”
This is likely the case, so she rolls the money into here “existing IRA” and can’t take any money out before 59.5 without a penality but wouldn’t be subject to RMDs until 70.5 in 2025? Did I get this right?
Permalink Submitted by Bruce Steiner on Mon, 2011-01-03 00:53
Are you asking about your planning now, or about your wife handling your estate after your death? In either case, Seattle is a major city, and there should be many capable tax/estates lawyers there. Like finding a physician, dentist, plumber, or anyone else, you might ask people whom you think might be able to make a recommendation. You can then check their firm’s website and get additional information about them. Alternatively, especially if you’re retired, if the amount involved is large enough, you and your wife you can get on a plane and see a lawyer anywhere.
Another possibility is to look at the lawyers in the directory of the local Estate Planning Council. Go to http://www.naepc.org . On the right side, click on “Find an Estate Planning Council in Your Area.” In the middle of the page that brings up, where is says “All States” with an arrow to the right, click on the arrow and select “Washington.” Below that, click on “Search Local Councils.” That brings up a list of the Estate Planning Councils in Washington. Click on the second listing, “Estate Planning Council of Seattle.” That brings up the page for that Council. On the left side, click on “View the Member Directory.” In the middle of the page, click on the third arrow “Designation” and select “Attorney At Law.” Then click on “GO.” That will bring up the names of the approximately 150 lawyers who are members. If you click on a names, it will display additional information. You can then go to the firm websites of the ones you want to further check on.
Permalink Submitted by Alan Spross on Mon, 2011-01-03 01:49
Addressing your questions in last two posts:
1) If you passed after she reached 59.5 and before you had any RMD requirement, she should just roll over the IRA to her own IRA. She could not have the IRA retitled since there are other beneficiaries. The rollover would provide her with the benefit of penalty free distributions but no RMDs until the year she reached 70.5. There would be no advantage for her to maintain the IRA as inherited, particularly since she would have to take RMDs because she is not the sole beneficiary. She could do this rollover by either direct transfer or indirect rollover.
2) If she was not yet 59.5 and wanted to preserve the option of taking penalty free distributions, she would have to transfer the funds into an inherited IRA showing both your name as deceased IRA owner and her name as beneficiary on the registration.
3) If she rolls to her OWN IRA, her RMDs do not start until she is 70.5. Before that she can take out nothing or any other amount she wishes without penalty. If you had any unrecovered basis in your IRA from non deductible contributions, she inherits her share of those and after that a small share of her distributions would be tax free.
Permalink Submitted by Judith Krasniewski on Wed, 2013-06-19 21:08
What if the beneficiary of a 401(k) is the mother or brother of the deceased, neither of which are US citizens, nor live in the US and don’t have social security numbers.How can the funds be distributed ?
Permalink Submitted by Bruce Steiner on Thu, 2013-06-20 02:45
With income tax withheld at 30%, or the rate under the applicable tax treaty, if any.
Permalink Submitted by Larry Klingensmith on Mon, 2013-06-24 12:30
I have a client who’s husband died a couple of years ago and we rolled his retirement plan money into her IRA. Her mother died the following year and she was one of the designated beneficiaries, so we set up an inherited IRA for her for the money. She called me the other day to inform me she was just told her deceased husband owned two additional IRA’s with another company and she needed to do something with the money, they would prefer her to take it. My question, in order for her to establish an inherited IRA with this money she would havehad to do so before December 31 of the year following the year of death. Can she still roll this money to her IRA even though he died 3 years ago?
Permalink Submitted by Jose Morales on Mon, 2013-06-24 15:56
A spouse beneficiary can always roll over to their own IRA, however there may be some issues with not taking an RMD for the unknown IRAs for 3 years prior to rolling the funds over to their own IRA.
Permalink Submitted by Alan - IRA critic on Mon, 2013-06-24 23:33
An IRA inherited solely by the surviving spouse may or may not require beneficiary RMDs. If the RMDs are required and not taken, the IRA then defaults to ownership status for the surviving spouse. That will reduce RMDs in most cases, and therefore reduce any potential penalties, although a penalty waiver should be requested since the IRS waives most penalties in this situation. If surviving spouse defaulted to ownership status, the IRA should be properly re titled. Finally, the 12/31 deadline you mentioned may influence the RMD amount, but there is no such deadline to properly title an IRA as inherited. Her age amd the decedent’s ages should be examined before deciding what action to take with these accounts.