Slott Report Mailbag: Does My Inherited IRA Automatically Transfer to Me?

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

This week’s Slott Report Mailbag answers questions about inherited IRAs and naming a trust as the beneficiary of employer plan retirement assets. 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.

Hi Ed,

Can you be employed and contribute the maximum to a 457 plan in addition to owning an S-corp and contributing the maximum to a SEP plan through the S-corp at the same time? Are either contribution limited to the total of $51,000 that the SEP is limited to (i.e. $17,500 contribution to the 457 and $33,500 to the SEP for a grand total of $51,000)? Or can both accounts be maxed out in any given year?

Thanks in advance for your guidance!

Christy

Answer:
If the 457 and the S-corp are unrelated employers, you can potentially contribute the maximum to each plan, assuming your compensation with both employers is large enough to do so.

2.

I’m a beneficiary of my father’s 403(b) plan. Does this transfer to me automatically as inherited IRA? Or do I have to apply for it as an inherited IRA? Can I keep it as inherited IRA and not draw money from it? How can I avoid being taxed from this account? Thank you.

Marie

Answer:
As a beneficiary, you must be given the option to do a direct transfer from the 403(b) plan to an inherited IRA. There is paperwork you have to complete to set up the inherited IRA. You’ll have to take required minimum distributions each year which are taxable to you when you receive them. Missed distributions are subject to a penalty of 50% of the amount not taken. If you don’t want to set up an inherited IRA, then you’ll likely have to take a lump-sum distribution from the 403(b) which will be taxable to you all at once.

3.

Dear Mr. Slott and Staff:

Several years ago, following my review of the Stay Rich Forever and Ever materials, I converted several hundred thousand dollars in my 401(k) plan to a Roth 401(k) plan, and made my grandchildren the beneficiaries. In addition, my deferrals have been added to my Roth account for the last several years. I intend to continue to designate my deferrals to the Roth account as long as I work.

My question: Can I place the Roth in a trust, which mandates that the amount taken by the grand kids cannot exceed the mandatory distribution, thus avoiding the possibility that one or more of them could withdraw their respective share in one fell swoop, and thus destroy the intent of my gift to them? If not a trust, is there any other way that I can accomplish the same end result?

Answer:
While you are alive, you cannot place your Roth 401(k) in a trust, however, you can name a trust as the beneficiary of your employer retirement plan. Make sure the plan will recognize a trust as the beneficiary of your plan benefits. The trust can be drafted to limit access to the funds, but to avoid IRS penalties, required minimum distributions must be paid each year after you die. Naming a trust as beneficiary of a retirement plan has many tax and estate planning complications that you should discuss with a competent professional.