Preparing for Inherited IRAs: This Week’s Q&A Mailbag | Ed Slott and Company, LLC

Preparing for Inherited IRAs: This Week’s Q&A Mailbag

By Beverly DeVeny
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This week's Slott Report Mailbag looks into inherited IRAs, calculating RMDs, and 60-day rollovers.  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.

Question:

I read the Slott Report on a regular basis and enjoy the new information I learn. I have a client related question.

A client is doing estate planning and naming his spouse as the primary beneficiary to his IRA. He wants to name his son and 2 grandchildren on a percentage basis as secondary beneficiaries. If his spouse predeceases and the secondary beneficiaries now have an inherited IRA, will the life expectancies be those of each of the 3 beneficiaries or the life expectancy of the son who is 30+ years older than his children?

Thanks for your time and keep the great reports coming. - Jay

Answer:

The beneficiaries have until December 31st of the year after the client’s death to split the IRA into separate inherited IRAs for each beneficiary. Then each beneficiary can use their own life expectancy for calculating RMDs from their inherited IRA.

A word of caution – if the grandchildren are minors they will need to have a trust or a guardian in place to handle their inherited IRA(s) until they are no longer minors. The client should check with the IRA custodian to find out what their requirements are when a minor inherits an IRA. If the IRA is large enough, a trust for the minors may be the better option as a contingent beneficiary.

Question:

Ed,

I have a client retiring who has a defined benefit plan. She wants to take about $100,000 of this account and set up an IRA money market account. The balance will be put into deferred annuities for income later down the road. Can she have the check for $100,000 made out to her and then go wherever she wants to set up the IRA money market as long as it is done within the 60 rollover period?

Please advise. Much appreciated.

Regards, Jude

Answer:

Yes, she can have the check made payable to herself and do a 60-day rollover, but she will not actually receive a check for $100,000. There will be a mandatory 20% withholding taken out of the check so her check will be only $80,000. If she has $20,000 available, she can add it to the check and deposit a total of $100,000 in the IRA. When she does her federal income tax return she will get a refund for any overpayment of taxes. If she cannot replace the withholding amount, it will be treated as a taxable distribution on her tax return. 

 

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