Inherited IRAs/401k

[kannon]

I been trying to get a simple summary of what happens when you inherit retirement money. This is what I believe are the facts concerning inheriting money and using the lifetime RMD, please correct if I am wrong.

Traditional IRA (funded with pre-tax dollars)
- inherited assets grow tax deferred
- follow RMD over new owner's lifetime
- distributions are taxable

Traditional IRA (funded with after tax dollars)
- inherited assets grow tax deferred
- follow RMD over new owner's lifetime
- distributions are taxable except for original contributions which were paid with after tax monies

Roth IRA
- inherited assets grow tax deferred
- follow RMD over new owner's lifetime
- distributions are NOT taxable

Traditional 401k (funded with tax deductible dollars)
- inherited assets grow tax deferred
- follow RMD over new owner's lifetime
- distributions are taxable

Do I have this correct??

Thanks

[Happyras]

See death of the stretch IRA-several sites
Mitigating the Death of the Stretch IRA

[SecondCor521]

The first and third entries are essentially correct as far as I know. I would add that there are two significant restrictions in order to do the lifetime RMD mentioned:

1. All beneficiaries of the IRA need to have life expectancies. That is, none of the beneficiaries of the IRA may be a trust or charity.
2. The IRA needs to be split amongst the beneficiaries within a certain time frame after the death of the original owner.

Also, the inherited IRAs need to be titled correctly, although this should be standard operating procedure for any major custodian like Vanguard or Fidelity or Schwab.

[scrabbler1]

Quote:

Originally Posted by SecondCor521 The first and third entries are essentially correct as far as I know. I would add that there are two significant restrictions in order to do the lifetime RMD mentioned: 1. All beneficiaries of the IRA need to have life expectancies. That is, none of the beneficiaries of the IRA may be a trust or charity. 2. The IRA needs to be split amongst the beneficiaries within a certain time frame after the death of the original owner. Also, the inherited IRAs need to be titled correctly, although this should be standard operating procedure for any major custodian like Vanguard or Fidelity or Schwab.

Back in 2012, my best friend's remaining parent (mom) died unexpectedly, so her considerable estate was split among my friend and his sister. I have been helping my friend manage his portfolio which includes an inherited IRA. Everything you wrote did happen in the few months after his mom died and her IRA was split up fine. My friend's BIL is an investment banker so he needed some clearance to avoid conflict-of-interests with some individual stocks in the IRA and brokerage account.

Hurricane Sandy caused some delays in the split of my friend's inheritance because the admin's office was in lower Manhattan, but it all got straightened out eventually.

[calico1597]

I was widowed at age 38. I just rolled his traditional IRA into my own. I've kept track over the years how much was tax deductible at the time. I later went to work full time and after retirement rolled my 401K into that account. I'm now 65, retired for six years and have yet to draw any of the funds. My FA (yes, I know, a dirty word) tells me I'll have about $25K per year when it's time for minimum distribution in five years. Haven't needed any of the $$$ so far.

[GalaxyBoy]

In addition to the above, it is my understanding that if the deceased had not yet taken the required RMD in the year of death (if applicable; i.e., if he or she was at least age 70.5), then that RMD must be taken in the year of death, then the new owner's RMDs kick in the following year.

[scrabbler1]

Quote:

Originally Posted by GalaxyBoy In addition to the above, it is my understanding that if the deceased had not yet taken the required RMD in the year of death (if applicable; i.e., if he or she was at least age 70.5), then that RMD must be taken in the year of death, then the new owner's RMDs kick in the following year.

This happened with my friend, too. The rep from the IRA admin first had to do the RMD (which was taxable for the estate), then split the account between my friend and his sister. Because this was a cash transfer from the IRA to the brokerage, there was another small delay in splitting the brokerage.

[Luck_Club]

This calculator is helpful when playing around with inherited ira's.

Beneficiary RMD Calculator | Charles Schwab

When the day comes, there is a good chance the brokerage will setup what needs to take place and walk you through it.

[googily]

I have inherited my husband's 401k this year. I took it as a separate new inherited IRA because I am only 50 and wanted access to the money during the next 10 years without incurring a 10% penalty. (As a spouse I could have rolled it into my existing IRA had I wanted.)

My RMDs will begin next year. If I don't need the money, I'll just invest it in my after tax account.

His siblings inherited his IRA, and it is essentially the same for them. Just no option to roll into their own IRA. Their stepfather was bummed that there are RMDs, because two of the siblings have no savings to speak of, and he had hoped this could remain untouchable until they turn 59.5.

[kannon]

So answers my basic question of inherited Roth vs Traditional IRAs.

At a recent meeting a FA said that Inherited IRAs RMDs are inherited. The better way he should have explained it is that inherited Traditional IRA RMDs are taxable, inherited Roth IRAs RMD are not taxable.

For us that is motivation to do some IRA conversions to Roth to make it easier for our kids when they inherit our assets.

[Sue J]

Be sure to read how inheriting an IRA from a spouse is different from inheriting an IRA from a non-spouse, like a parent.

My understanding is that if you inherit it from a spouse you can treat it like your own IRA. You may even be able to mingle the funds, but I'd have to check on that.

When it's from a non-spouse you need to always keep it separate with it titled as an inherited IRA and the RMDs are based on your own life expectancy. The table for the RMD calculation is different than the table for ones own IRA RMDs.

[kaneohe]

Quote:

Originally Posted by kannon ....................................... For us that is motivation to do some IRA conversions to Roth to make it easier for our kids when they inherit our assets.

You might want to compare kids' tax rates vs yours..........if theirs is lower, they''ll end up w/ more if you don't convert.