Inherited IRAs and IRA Contributions Highlight Mailbag

By Marvin Rotenberg, IRA Technical Expert

This week’s Slott Report Mailbag answers questions on inherited IRAs (beneficiary forms vs. wills), splitting an IRA at death and IRA contributions. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

One of four children was made the sole beneficiary of an inherited IRA. The decedent’s will clearly states that all assets are to be divided equally among the 4 heirs (the children). Can the sole beneficiary make a qualified disclaimer to the IRA custodian, allowing the four children to be the beneficiaries thereby allowing the custodian to issue the 1099R (upon distribution) to the four children equally?

Answer:
The beneficiary form governs where the money from the IRA goes, regardless of what the will states. The sole beneficiary can disclaim all or a part of the inherited IRA within nine months of the death of the IRA owner. The disclaimed portion will then go to the contingent beneficiary named on the designation of beneficiary form. If there is no contingent beneficiary named on the form you will have to refer to the custodian’s IRA agreement to determine the default beneficiary. If, by default, the estate is the contingent beneficiary, which is often the case, the other three children would not be able to use their own life expectancies to stretch the inherited IRA. Their distribution option will depend on the age of the account owner at the time of death.

2.

Dear Ed,

An 83-year-old woman and NY resident has an IRA and is making the minimum withdrawals. She wants to leave the IRA to her four sons as an inheritance and has named all four as beneficiaries. A question came up about how the funds would transfer after her death given that all of her children are at varying ages (56, 54, 47, 44). There was a concern that it would not be distributed evenly between them. Any insights are appreciated.

Answer:
The first thing you want to do is check the designation of beneficiary form on file with the IRA custodian. That will indicate who the beneficiaries are and what percentage they are entitled to. In this case, you want each child to receive one-quarter share.

At the death of the IRA owner, the account should be split, no later than 12/31 of the year following the year of death death, into separate inherited IRAs. If this is done correctly then each beneficiary can use their own life expectancy to stretch their annual RMDs. The way this is accomplished is via a trustee-to-trustee transfer, directly from the decedent’s account to the inherited IRA account.

When establishing the inherited IRAs make sure the decedent’s name is in the title.

For example: Mary Smith IRA deceased (date of death) FBO child’s name.

In this scenario, each child inherits an equal amount. The distributions over their lifetimes, if everyone takes only the required minimums, will not be equal, as the younger siblings will receive more in total than the older siblings. The trade-off is that they get less each year than the older siblings.

3.

I mistakenly contributed to my SEP IRA for two years after my business was closed instead of contributing to my regular IRA. How can I correct this?

Mary

Answer:
I’m assuming you are referring to your personal IRA contribution amount. That is okay so long as you had earned income to support the contribution in that year. In addition the contribution amount should not exceed the contribution limit for that year. The contribution limit is $5,000, however, if you are age 50 or older by 12/31 of that year you can contribute an additional $1,000 for a total of $6,000.