inherited IRA – wrong decision? now what?
I have just taken on a client who has an inherited IRA from his spouse who died 8 years ago (he is currently 54 and she would have been 54 currently). He has never taken any distributions from this inherited IRA. My firm’s IRA department said that he should have been distributing from this inherited IRA each year. They said that they can change the registration over to an IRA in the client’s name, but then he may be vulnerable if he is audited in the next couple years? Is this all correct, can anyone comment on some options here?
Permalink Submitted by Alan Spross on Thu, 2010-12-09 21:51
Actually, it’s all incorrect!
RMDs on IRAs inherited from a spouse do not need to begin until the year the decedent would have reached 70.5. That year appears to be around 2026. Therefore, there are no delinquent RMDs on this inherited IRA. In addition, assuming ownership of this account will subject the client to a 10% early distribution penalty until he reaches 59.5, so if there is any possibility that he will needs these funds in the next 5 years, he should leave the inherited IRA just as it is. Of course, it should be properly titled and he should name successor beneficiaries.
Upon reaching 59.5 he should roll this inherited IRA over to his own IRA or simply re title it as his own. Since they were the same age, his RMDs will begin on his own IRA at the same time they would have been done if he retained the inherited status, but they will be less if he assumes ownership.
One final thing to do is to check if his spouse had ever made non deductible contributions to her IRA as documented on Form 8606. These could have been made between 1987 and her death. He inherits any unrecoved basis and it will make any distributions he does take partially tax free. After he does the rollover at 59.5 any basis left is added to any basis he may have in his own IRA.
So as of now, no problems at all for this client. However, that may not be said of your IRA Dept.
Note: I am assuming they were married on the date of her death……