Non-spouse inherited IRA

[stephenson]

My mother died last year at 88 and left what remained of her IRA (managed by Fidelity) to my two sons, ages 29 and 24 - I have no idea of the amount as she had been taking distributions for many years. My sister is the executor of the estate.

One of the will provisions is that neither son can receive funds from the inherited IRA until age 27 ... I've reviewed a lot of IRA information and can't find even a word about this ... it certainly doesn't seem to make sense as the inheritor would need to take distributions the following year based on what the original IRA owner was taking.

Thoughts and advice on how I should advise my sons?

Thanks!

 

[teejayevans]

First , if required, make sure the RMD for your mother was done. You sons have until e/o next year before they have to do anything.
Second, make sure its converted to a beneficiary/inherited IRA.
They must start taking distributions starting next year, I believe the 3 options are:
lump sum
over 5 years
based on your life expectancy

guess it depends on how bad they need the $

 

[2B]

If they inherited a Fidelity IRA, the executor needs to contact Fidelity to inform them that the owner is now deceased. Your sister will need the death certificate and her paperwork establishing her as the executor. Your sons will need to give their SS number and other information to Fidelity to establish their accounts.

It doesn't matter what your mother put into her will. They are now your sons' accounts. If she really wanted to control the funds after death, she needed to establish a trust. You can advise your sons on index investing et cetera. If the amounts are more substantial, they can set up the RMD through Fidelity which is the minimum amount that must be withdrawn to meet IRS guidelines.

I don't believe there is any penalty involved in withdrawals from inherited IRAs other than the normal income tax rates. If this isn't correct, I'm sure I'll be flamed soon for the statement but you can verify this with Fidelity. If your sons are in low tax brackets, this is a good time to get the money out. If possible, it's a good time to fund a Roth in their names if they are eligible.

If the amount is small and won't cause a tax spike, I'd suggest your sons take the money immediately.

 

[stephenson]

Re-the restriction on age - that's what I thought - couldn't see a legal way to restrict an IRA transference.

She died in 2012, so we have till end of 2013, only. I didn't want to press sister to much since they had been a "partnership" and lived together. She apparently believed the transfer was per any will restrictions.

Assuming she did NOT take RMD in 2012, would that affect what sons need to do prior to end of 2013? If they dont "cash out" (since don't know amount don't know what consequences could be) they have to take an RMD, regardless, right?

They are both in 30-35% rate since are unmarried and have pretty good income - would probably advise them to take minimum out based on their own age. If small amount, agree, would make sense to cash out.

I didnt know they could convert to Roth, but assume same rules would apply with conversions?

 

[steelyman]

I think the suggestion may have been to fund a Roth, not convert.

 

[GrayHare]

I think the suggestion may have been to fund a Roth, not convert.

+1 Inherited tIRAs cannot be converted to Roth.

 

[GrayHare]

One of the will provisions is that neither son can receive funds from the inherited IRA until age 27 ...

The tax code requires at least RMDs to be taken from inherited IRAs, so to fulfill this portion of the will perhaps the withdrawals can be held by a guardian until age 27.

 

[steelyman]

I thought the designated beneficiaries for the IRA trumps whatever is in the will. Especially if they are not minors.

 

[scrinch]

Could be different if they are named beneficiaries as opposed to just named in the will.

 

[MichaelB]

Thoughts and advice on how I should advise my sons?

Thanks!

You need to verify the IRA beneficiary designation. If it is your sons, as pointed out earlier, they are the owners and, subject to RMD's, free to withdraw as they choose. If there is no beneficiary designation or it has been made to a trust, then the will conditions may be enforceable.

 

[kaneohe]

You need to verify the IRA beneficiary designation. If it is your sons, as pointed out earlier, they are the owners and, subject to RMD's, free to withdraw as they choose. If there is no beneficiary designation or it has been made to a trust, then the will conditions may be enforceable.

second this........and it needs to be verified at the IRA level at Fidelity with somebody's own two eyes. It is possible that the executor is just going from the will.

 

[teejayevans]

Assuming she did NOT take RMD in 2012, would that affect what sons need to do prior to end of 2013? If they dont "cash out" (since don't know amount don't know what consequences could be) they have to take an RMD, regardless, right?

They are both in 30-35% rate since are unmarried and have pretty good income - would probably advise them to take minimum out based on their own age. If small amount, agree, would make sense to cash out.

Before you do anything, you need to figure out if the RMD was taken in 2012. IF not, you have a couple of options:
3 Steps To Take If You Miss Your RMD Deadline
BTW, the excise tax for not taking RMD is 50%.

 

[jon-nyc]

The RMDs are required but there's no requirement that the funds get spent.

If your sons wanted to honor your mother's wishes they could take the RMDs and put them in another account until they are 27 or (hopefully) older. The Roth would be a fabulous idea.