Inherited IRA

[ronin]

My mother passed away last month and I am in the process of winding up her financial affairs. So far, of what little there is, my sister and I are either co-beneficiaries or already had joint owner status so it has been pretty easy.

The only hiccup is a traditional IRA CD at Chase. According to the records I have, she made a note that my sister and I were "added to the account" in 2001. I assumed this meant added as beneficiaries. But in dealing w/Chase, they say there are no beneficiaries.

The rep at the branch I contacted forwarded all the particulars to what I assume is the corporate section in charge of these things and said that they would investigate further and get back to me in 2 days, which not surprisingly didn't happen.

Wondering if anyone has been in this situation and what to expect. I would figure there is a policy for distribution to next of kin (she was widowed and my sis and I are it). Not expecting this to be a big ordeal, and its a small amount involved. Just have to go back at them and would like to come in armed with some knowledge.

 

[MichaelB]

Condolences on your loss.

It's possible a beneficiary was named but the document was misplaced or never recorded. The Bank has a written policy regarding IRA disposition when there is no named beneficiary, they should give it to you on request. Check the IRA kit as well, it may be spelled out there.

 

[38Chevy454]

If you have any will or trust docs, that would also support your evidence as you and your sister being the only recipients of your mother's assets. I am not sure on an IRA, it may require official court (aka probate) to make it happen though if only a will. A trust is not used for IRA's.

 

[Another Reader]

Passing directly to beneficiaries is MUCH better than passing to the estate or a trust. The worst part of passing to the estate is the heirs do not get the benefit of taking the RMD's over their lives. IIRC, the estate has to take it out over a much shorter time, I think it is 5 years.

This came up in one case with which I am familiar. In this case, Fidelity failed to enter a beneficiary form correctly and the beneficiary "disappeared" from the account. It took a very good estate attorney and a probate court order to correct the beneficiary. This was a very large account and the tax consequences of not correcting the mistake would have been substantial.

Since it is a small account, the executor may want to accept the lack of beneficiary and distribute the account per the IRS' rules.

 

[ronin]

Thanks for everyone's input. It turns out that my sister and I were made beneficiaries, although it didn't show up in the initial look at the account in their computer system. Go figure.

So, tomorrow I will fill out the paperwork to have my portion transferred to an inherited IRA and after it is rolled out of Chase to my IRA custodian I will be able to stretch the RMDs over my life span using the Single Life table beginning next year. The RMD for my mother this year has already been made back in January.

 

[heeyy_joe]

Kudos to good 'ol Mom & very sorry for your loss of her. She done good!

 

[FinanceDude]

Thanks for everyone's input. It turns out that my sister and I were made beneficiaries, although it didn't show up in the initial look at the account in their computer system. Go figure.

So, tomorrow I will fill out the paperwork to have my portion transferred to an inherited IRA and after it is rolled out of Chase to my IRA custodian I will be able to stretch the RMDs over my life span using the Single Life table beginning next year. The RMD for my mother this year has already been made back in January.

100% correct....I am late to the thread but that is standard procedure. Be sure to take those RMDs and reallocate to a vehicle that matches your goals.............TOO many people forget and just have the RMD amount roll to a bank account paying .001%..........

 

[steelyman]

I received an inherited IRA last year. The original accounts were split between two firms: Fidelity and another one that is so distasteful I won't mention the name.

I went through the transfer process and when Fidelity received it they placed the proceeds in a "core account", which is SPAXX (Government Money Market, zzzz). I had no idea then what the broad markets would do, so I started a two-year dollar cost averaging plan. I'd do the same thing today although I no doubt passed up some return.

Edit: actually, I am not doing dollar cost averaging, more like the rules for RMDs. The first month I did 1/24, then 1/23, and so on. This month it's 1/9 of the remaining cash. Getting there!

 

[ronin]

So, I finished opening the "inherited" IRA today. The Chase reps (took 2 to figure it out) were friendly enough, if clueless. They weren't sure Chase offered such a thing. Then they wanted to cut me a check so that I could mail it to my IRA trustee, which would have been a big boner since there is no 60-day grace period on inherited IRAs. Ended up with what they call a Beneficiary IRA, incorrectly titled I believe, as they wouldn't include the name of the deceased FBO me. Ah well, fortunately I know enough to get it where it safely belongs. I was going to ask them about their investment options, just for kicks, but would have needed to see a 3rd person as banking and investments are separate: Chase/JP Morgan. At that point, I just wanted to go home so I shined it.

 

[MichaelB]

So, I finished opening the "inherited" IRA today. The Chase reps (took 2 to figure it out) were friendly enough, if clueless. They weren't sure Chase offered such a thing. Then they wanted to cut me a check so that I could mail it to my IRA trustee, which would have been a big boner since there is no 60-day grace period on inherited IRAs. Ended up with what they call a Beneficiary IRA, incorrectly titled I believe, as they wouldn't include the name of the deceased FBO me. Ah well, fortunately I know enough to get it where it safely belongs. I was going to ask them about their investment options, just for kicks, but would have needed to see a 3rd person as banking and investments are separate: Chase/JP Morgan. At that point, I just wanted to go home so I shined it.

Strange. I thought the new IRA was required to have the name of the deceased with FBO. Keep the paperwork just in case.

Edit: This was an IRA with two beneficiaries, correct? I may be wrong but I thought each one needs a new IRA with the name of the deceased and the name of the new beneficiary or you both might be required to take distributions based on the original deceased RMDs.

From Ed Slott https://www.irahelp.com/faqs.php

Under the tax code, any living beneficiary that is named on the beneficiary form can stretch distributions over their life expectancy. In order to do this you must first establish a properly titled inherited IRA. The title MUST include the name of the decedent. For example: John Smith, deceased, IRA for the benefit of Mary Jones. Then the funds are transferred, ONLY as a trustee-to-trustee transfer, to the inherited account. Any distribution that is payable to you will be taxable and will not be eligible to go into any IRA account.

 

[steelyman]

Mine is titled with "BDA" (Beneficiary Distribution Account).

 

[ronin]

This was an IRA with two beneficiaries, correct? I may be wrong but I thought each one needs a new IRA with the name of the deceased and the name of the new beneficiary or you both might be required to take distributions based on the original deceased RMDs.

My sister is going to take her portion as a cash distribution and pay the taxes up front so only one inherited IRA needed. My understanding is that if 2 beneficiaries don't have separately titled inherited IRAs, RMDs are based on the age of the oldest beneficiary.

Based on the application to transfer, my custodian will title the account "deceased (date of death) FBO beneficiary". Apparently, different institutions have different interpretations of the IRS tax code. My guess is that is near the bottom of things the IRS has interest in looking at. But directly from Publication 590:

"Inherited from someone other than spouse. If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary (emphasis added)."

 

[tulak]

I went through this a few years ago where my mother passed with three beneficiaries. Her IRA was split into three inherited IRAs, at which point we could each choose what to do.

I'm sure one sibling cashed his out. The other sibling didn't do anything, which means they have to cash it out within 5 years. I took the periodic RMDs, which allows me to take withdrawal indefinitely. Well, at least until I pass.

If you want to take periodic withdrawals indefinitely, then you need to start within the first taxable year you received the IRA. Otherwise you are required to cash it out within 5 years. I know my sibling that didn't do anything with hers would have preferred keeping it indefinitely, but unfortunately it's too late.

My mother had her IRA at Vanguard and they handled spitting it into three inherited IRAs without any problems. I was executor of my mother's estate and this was easily one of the painless items I had to deal with.

I'll also add that RMDs at Vanguard is a piece of cake. At the beginning of the year, they calculate how much I need to withdraw, which I pretty much do immediately.

 

[tulak]

Btw, I'd also add that it's probably easiest to split your mom's IRA into separate Inherited IRAs for each of you. Then it's up to your sister if she wants to cash hers out, take RMDs, etc.

In the end, all they do is create separate accounts and transfer the funds into new accounts. Then each of you can do what you want. I'd be more wary of a half cash distribution from your Mom's IRA to your sister and then the other half into an inherited IRA for you. That seems messier and I'd also wonder if it would go against the estate as a withdrawal from your Mom's IRA.

 

[kaneohe]

I took the periodic RMDs, which allows me to take withdrawal indefinitely. Well, at least until I pass.

kiki.........this may be close in reality but strictly speaking it's not quite true.
The RMD factor that you use initially is reduced by 1 each yr so eventuallly
it becomes 0 and you have to take everything out. This is different from the procedure for your own IRA where you look up a new factor each year.

Inherited IRA Rules

 

[tulak]

Kaneohe, thanks for the correction. It's been a few years since I did this, so I didn't recall all the details.

I skimmed the article you linked and it looks to be well written. They also cover the case of splitting the IRA along with the benefits. I know in my case it made it a lot easier. I find that anytime you're dealing with money and family, the easier you can make it, the better off for everyone involved.

 

[GrayHare]

Do Inherited IRAs get the same level of asset protection from creditors that one's own IRAs do? If so, that can be a reason to withdraw only the RMDs.

 

[kaneohe]

Do Inherited IRAs get the same level of asset protection from creditors that one's own IRAs do? If so, that can be a reason to withdraw only the RMDs.

interesting question..........had never thought much about it since my state has very poor protection for IRAs.

surprised to find the answer might be..........not necessarily. Apparently still a work in progress http://online.wsj.com/news/articles/SB10001424052702304441304579477150954100222

 

[MBAustin]

kiki.........this may be close in reality but strictly speaking it's not quite true.
The RMD factor that you use initially is reduced by 1 each yr so eventuallly
it becomes 0 and you have to take everything out. This is different from the procedure for your own IRA where you look up a new factor each year.

Inherited IRA Rules

Thanks for posting this article, kaneohe. My sister and I were the beneficiaries of my mother's IRA and I had a hard time finding all the right information in one place to know what to do earlier this year - but I think we did end up with everything OK.

One question - we both have our inherited IRAs now, but only part of the RMDs were taken for this year. Do we need to each take ½ of the remaining RMD this year or could (for example) one of us take 75% of it and the other 25% of it from our respective inherited IRAs? I've been looking for this info and haven't been able to find it yet.

 

[Htown Harry]

One question - we both have our inherited IRAs now, but only part of the RMDs were taken for this year. Do we need to each take ½ of the remaining RMD this year or could (for example) one of us take 75% of it and the other 25% of it from our respective inherited IRAs? I've been looking for this info and haven't been able to find it yet.

I don't know the answer, other than to say the 50/50 approach would be easier for your own individual tax returns and less likely to raise IRS questions. Once the original account is split, the two beneficiary accounts are independent.

Besides, if one of the beneficiaries needs additional money, there's no reason they couldn't unilaterally take out an amount larger than 50% of the remaining RMD for year one.

The RMD is a minimum distribution. A beneficiary can take a distribution of the funds at any faster rate they choose, so long as each year's total withdrawals exceeds the RMD amount for that particular year.

 

[kaneohe]

Thanks for posting this article, kaneohe. My sister and I were the beneficiaries of my mother's IRA and I had a hard time finding all the right information in one place to know what to do earlier this year - but I think we did end up with everything OK.

One question - we both have our inherited IRAs now, but only part of the RMDs were taken for this year. Do we need to each take ½ of the remaining RMD this year or could (for example) one of us take 75% of it and the other 25% of it from our respective inherited IRAs? I've been looking for this info and haven't been able to find it yet.

THis would be a good exercise for me since I don't know the answer for sure and I'm leaving for the airport soon. May I suggest you ask on fairmark.com in the retirement subforum and look for a reply by Alan S.
He also posts on bogleheads.org so you could ask there also.

 

[tulak]

Thanks for posting this article, kaneohe. My sister and I were the beneficiaries of my mother's IRA and I had a hard time finding all the right information in one place to know what to do earlier this year - but I think we did end up with everything OK.

One question - we both have our inherited IRAs now, but only part of the RMDs were taken for this year. Do we need to each take ½ of the remaining RMD this year or could (for example) one of us take 75% of it and the other 25% of it from our respective inherited IRAs? I've been looking for this info and haven't been able to find it yet.

I'm not sure I fully understand your question. Was this for an IRA where your mother was already taking RMDs, but didn't take all of them for the year before passing away? And then before you took the full RMDs on your mother's IRA, you split her IRA into two inherited IRAs?

Once you receive an inherited IRA, then distributions are per IRA. This allows both you and your sister to choose what method you want to use, either life-expectancy or five-year method. RMDs at this point don't cross over, which makes me think maybe the RMDs on your mom's IRA weren't fully taken out for the year?

That would be an interesting situation and I don't know the answer. I think Kaneohe's advice is good in this regard, but please follow up once you figure this out since I think many of us would be curious to know how this is handled.

 

[tulak]

I found the following at: Year of Death Required Minimum Distributions ~ Ed Slott and Company – IRA, Tax, Retirement Planning Articles, Insight

The article didn't say much, but the follow-up comment was interesting:

Unofficially, IRS says that the deceased account owner's RMD should be pro-rated among the beneficiaries. The tax code says that the first money paid out of the account is the RMD. From the IRA custodian's perspective,
they usually want to split the account before any distributions are taken so that the distributions are correctly reported using the beneficiary's Social Security number.

Where does that leave you? If one beneficiary takes a distribution in the year of the account owner's death, those funds should be counted toward the account owner's RMD. If you decide to apportion the year of death RMD and one beneficiary does not take their share, then that beneficiary incurs the 50% penalty. And, if they do not report that penalty on Form 5329, IRS has ruled, and the Tax Court has upheld, that no return
has been filed, the statute of limitations does not start running, and the individual can be charged with failure to file penalties and interest in addition to the 50% penalty.

It seems to me that if you each received 50% of the original IRA, then you'd each want to pay 50% of the remaining RMD. It could be that the IRS wouldn't care, but in this case I'd agree with HTown Harry that it'd be less likely to raise IRS questions. What was also surprising is the amount of penalty. Ouch.

Here's another thread on the matter, stating that the IRS doesn't care how they receive their RMDs, only that they receive the full RMD (which must be paid by the beneficiaries): https://www.irahelp.com/forum-post/15744-ira-rmd-year-owners-death

The comments reference the following IRS regs, if you care to dig in further: Internal Revenue Bulletin - June 28, 2004 - T.D. 9130

As always, it would be best to verify with someone with more knowledge. I'm just digging up information on the internet and the information above may or may not be correct. It is an interesting question though.

 

[scrabbler1]

My friend's remaining parent (mom) passed away in 2012 so he and his sister split her IRA, each receiving an inherited IRA through Morgan Stanley Smith Barney, along with halfof a brokerage account. With my help, my friend moved both to Fidelity. His mom had not taken her RMD before she passed away so that was done first before the IRA was split up.

I recall his mom's name listed as part of the IRA's name, evenunder my friend's ownership. He took his RMD last year based on his own life expectancy in the denominator. That value will decrease by one each year until the IRA is exhausted. He cannot add any new money to this IRA but can, of course, withdraw any amount more than the RMD. For 2013, we simply rounded up to the next $100 and will do the same for 2014.

My friend doesn't need the RMD to cover his everyday expenses, se we arrange to have all of it (actually 99%, the most Fidelity allows) withheld for federal and state income taxes. This helps keep him in or at least closer to the "safe harbor" to avoid any underwithholding penalties and reduce or eliminate any need to make estimated tax payments. The inherited brokerage account generates a lot of investment income so it is fitting the inherited IRA generates some of the taxes due on it.

 

[ronin]

I found this in the Ed Slott IRA discussion forum concerning ira rmd in year of owners death.

Seems it doesn't matter which inherited IRA is used or in what percentage to satisfy the owner's RMD (see alan-oniras' response).

In my case, the RMD had already been taken prior to mom's passing. So, the income will be reported on her final tax return and there probably won't end up being any taxes due since her income for this year will be so low. Otherwise, if we had to take the RMD it would have been reported on our taxes and taxed at our combined 25% fed/9.3% state rates.

It's not a big deal, but I guess it could be a consideration for others. Maybe getting the RMD done early in the year, especially if one's health is failing would be a good idea although it probably wouldn't be one of the first things you'd be thinking about.