Need some advice on upcoming inheritance currently held at Ameriprise

[Htown Harry]

The value of current annuities that are subject to federal taxes and the IRA money, (approx $100K), causes me the most concern.

I'm not familiar with the tax issues on the annuities, but there are three basic withdrawal options on the share of the IRA you have inherited: withdraw it all by the end of the year after the decedent's death, withdraw it all on a 5 year schedule or withdraw it over a longer period using a table of Required Minimum Distributions (RMDs). The applicable RMD table is not the same as for over-70 withdrawals from your our IRA account, but the concept is the same: the percentage starts out low and grows a bit each year.

All three methods result in the amount withdrawn being reported to the IRS as taxable income via a 1099-R. Any of the three have the option to accelerate taxable withdrawals if you need the cash or if your tax planning has some ceiling room for additional taxable income before hitting the top of a tax bracket or an income target.

It sounds like the RMD option would be best for you, minimizing taxable income in the years you hope to qualify for an ACA subsidy.

I'll give an example of how setting up an Inherited IRA at Vanguard has worked for DW over the past few months.

DW's mother died in September. She left a traditional IRA at Broker X to two beneficiaries named back when she set up the accounts - DW and my BIL. We're on the home stretch of a multi-step process that will end with DW's 50% share being held in a self-managed Vanguard Inherited IRA.

• Death was reported to the IRA custodian a few weeks after the event. The only immediate action was to stop any scheduled distributions and to confirm beneficiary status for DW and her brother. (Roughly where you are in the process.)
• Each beneficiary acts separately. BIL wanted the cash, so he submitted a distribution request. DW submits paperwork to set up a beneficiary account with X, in this case an “Broker X Inherited IRA Application.”
• X sends a “thank you for choosing us” new account package by mail. DW uses the new account number to set up online access, showing a $0 balance.
• After several weeks of no change in the balance, we call X. “Oh, I see you haven’t submitted the Inherited IRA Distribution form.” We go to the local X office to complete the form, have it notarized, and turn it in.
• About that time, we call Vanguard for some guidance. We mail a “please set up a $0 account to receive a transfer” letter with the Vanguard “IRA Asset Transfer” form.
• A week after sending the forms to X, 50% of the fund shares in MIL’s account are transferred to DW’s account. DW now owns shares in a dozen high-fee mutual funds.
• A few days later, the new Vanguard account is established and shows up on DW’s online account page.
• Next - with both an origin and destination account number now available - we initiate the trustee-to-trustee transfer by mailing an account-specific “IRA Asset Transfer” form to Vanguard.
• A week later, a “transfer in progress” message appears on the Vanguard account page, with another 12 days estimated for completion
• X calls by phone the next week. They have received Vanguard’s request, but there were a couple of points to confirm. The most important thing was they wanted DW to go on-line herself to sell all the mutual funds that were formerly in MIL’s account. (This saved some money vs. them liquidating the mutual funds on our behalf.)
• X mails a check to Vanguard the next day.
• A week later, the funds have arrived and have been used to purchase a MMF in DW’s Vanguard Inherited IRA account.
• At the end of January, statements from X arrive and say that there is a $6 balance in DW’s X account, due to some lagging dividend postings.
• X sends the $6 to the Vanguard account a week later, with no prompting.
• Right now, we’re waiting to see the $6 posted to the Vanguard account.

In hindsight, the particular path we chose was probably less than optimal. Total elapsed time was 5 months. This could have been cut in half or less if we had avoided some procrastination and if we had been more diligent in pestering X and Vanguard to be sure there was always some action underway.

Keep good notes as you go along.

 

[Sue J]

Htown Harry,

Thanks for the step by step notes on how your wife handled this. My Dad will be 88 next month and his assets are all in a Traditional IRA. My sister and I are the beneficiaries. I've read about the Inherited IRA and the RMDs but wasn't sure how you get through the process when the time comes.

His IRA is at Wells Fargo and it's multiple funds and stocks with high expense ratios. If anything is left I would move my half to Vanguard and simplify.

 

[Dash man]

You're getting a lot of great comments from people on how to handle the Ameriprise accounts, but I want to comment on two things.
You may want to reconsider adding your DW to the accounts. Once you add her the money is as much hers as yours. Two things can go wrong here. If you were to divorce her, she gets her half of the money. I'm not wishing that on you and hope it never happens, but you never know. The other concern is if you should die and she remarries, if she added him to the account...it now can be accessed by him and inherited by his kids. A better approach would be to keep it in your name and set up a trust for your wife and kids to keep it for their use. You can either put the money in the trust or make the trust the beneficiary. Check with an estate planning attorney for the best approach.
The second thing is the sale of the house. I was burned by the probate judge because we did not get an official appraisal of the property near the time of death. Property values at the time were rising rapidly and we had to wait until probate closed to sell the property. The judge set the value of the property much lower than our real estate agent said it was worth at the time of death. The state of California nailed us for taxes on the sale of the real estate for the difference on the actual sale price and what the judge set as the value at death. It took two years to close probate.