How Do I Take Required Minimum Distributions on an Inherited IRA? | Ed Slott and Company, LLC

How Do I Take Required Minimum Distributions on an Inherited IRA?

By Joe Cicchinelli and Beverly DeVeny
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This week's Slott Report Mailbag, proudly sponsored by GoldCo Precious Metals, comes to you live from Ed Slott's Elite IRA Advisor Group Workshop in Denver, Colorado. One of our mailbag questions - concerning required minimum distributions (RMDs) on an inherited IRA - is also covered in great detail in this month's IRA Focus. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

 

1.

Need your advice on a non-spousal IRA that I’ve inherited from my mother who passed away exactly at 70 years of age and did not receive any distributions. I am under 50 years old, and I’m quite confused about whether or not to roll this money over into some other sort of investment. The amount of money in question is over $250,000. I’m not in great need of this money, however, I’m not very well versed in investing either. I’m aware of the five-year rule and was advised by my accountant that I would face major taxes if taking this option, but I thought that I had read somewhere that I could take this money out according to the life table for RMDs at a much slower pace, which would not be so severe come income tax time. Any advice that you’d be able to bestow would be greatly appreciated.

Thank you.

Answer:
Because your mother passed away before her required beginning date, generally you can take required minimum distributions (RMDs) over your single life expectancy (stretch IRA) starting the year after she died. In almost all cases, you will not be stuck using the five-year rule unless you inherited through your mother’s estate because you were not named on the beneficiary form. As far as changing investments within the IRA, because you are a non-spouse beneficiary, you cannot do a 60-day rollover, but instead should directly transfer the funds to an inherited IRA. You can change the investments inside the inherited IRA.

 

2.

I currently have a 2014 non-deductible IRA since my income is too high for a Roth contribution. I also have a sizeable inherited IRA. Does the inherited IRA affect my ability to convert the non-deductible IRA to a Roth IRA this year or for upcoming years?

Answer:
No. The inherited IRA is not taken into account when calculating the taxation of any conversions you do from your own IRAs. Note that when converting any amount to a Roth IRA, you must include all of your non-inherited IRAs, including any of your SEP or SIMPLE IRAs. Also, as a non-spouse IRA beneficiary, you are not allowed to convert any of those inherited funds to a Roth IRA.

 

3.

Dear Mr. Slott,

Would you by chance know whether or not a financial institution is legally allowed to recode the tax year of a contribution?  I recently mailed a check directly to Fidelity postmarked prior to April 15, but failed to indicate the tax year of the contribution as 2014 and as a result the custodian coded the contribution for tax year 2015. My question is whether or not the custodian has the legal right to make this change based upon my request or is there no room for error in this situation.  Bottom line – I’m asking that Fidelity change the tax year from 2015 to 2014.

Your input on this matter would be very much appreciated.

Thank you.

Tammy

Answer:
The instructions to IRS Form 5498 say that financial institutions should report IRA contributions made in 2014 and through April 15, 2015, designated for 2014 as a 2014 IRA contribution. Because you didn’t’ designate your contribution as a prior year (2014) IRA contribution, the financial institution may assume the IRA contribution is for the current (2015) year. As a result, you may need to file an amended tax return for 2014. 

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