Inherited IRA titled wrong
Hello,
I am a 20 year old, whose father has passed away 7 years ago when I was 13. My father was 56 at the time of his passing (he would be 63 today). When he passed, the IRA was inherited by me, and my mother was guardian on the account. We consulted a financial advisor to help with the inheritance.
Recently, I started handling my own investments and removed my mother from being guardian on the account because I am over 18. During the process of removing my mom from the account, I realized the IRA was never titled as a beneficiary or inherited IRA, but just as a traditional IRA in my name. I confirmed this with the custodian company that it is just a regular IRA.
I realize that this is incorrect and I could’ve been taxed on the entire account when it came into my name 7 years ago. However, I wasn’t.
My question is, what should I do about this? Should I just leave it as it is? Will the IRS catch up with it? I feel like that would be illegal to know it’s incorrectly labeled and do nothing about it. It’s something I’m definitely a little stressed out about.
If I change the titling of it, what would happen?
Thanks so much for any help on this,
Mike
Permalink Submitted by Mike Jones on Thu, 2011-10-13 13:30
Also, truth be told, I don’t know what fully happened 7 years ago. I’m assuming the financial advisor just titled it wrong. If there’s another way I could have an Trad. IRA in my name without it being titled wrong, that is certainly a possibility as I don’t remember much about the process. However, it is a pretty significant balance – about $75k – and I know I personally didn’t make those contributions.
Permalink Submitted by Alan Spross on Thu, 2011-10-13 19:50
If this IRA is the same one you inherited and no distribution was taken from the IRA and rolled into one in your name, you can still have the IRA propertly registered as an inherited IRA. The challenge will be to convince the custodian to do this now. If the custodian is the original custodian it might be easier. Provide them with a copy of the death certificate and the other background.
If there was an actual distribution and rollover to a new custodian, then there is no solution other than litigation against the advisor or other people who messed this up.
Assuming you can get the IRA registered in beneficiary form, eg “m jones as beneficiary of d jones, deceased”. The second challenge will be to get the IRS to allow you to use your life expectancy for RMDs rather than the 5 year rule. Attempting that would require that you take all your back RMDs starting with the one for 2005 to 2008, and also for 2010 and 2011. RMDs were waived for 2009. Because of your age, these RMDs will be very small, and the 50% excess accumulation tax on them would also be small. To calculate the RMDs you would need to know the account balance at the end of each year. If you would have reached 14 in 2005, the 2005 RMD divisor is 68.9 divided into the 12/31/2004 balance. Each year after that the divisor is reduced by 1.0, so the 2011 RMD divisor would be 62.9. This means that this year’s RMD would only be 1.59% of the 12/31/2010 balance.
But it is not possible to predict what the IRS will do in any particular unique situation like yours. Because of your age and because you self reported the problem, they would probably be as liberal with you as possible. You might also consider hiring a tax specialist with experience in filing a request for a private letter ruling (PLR) from the IRS. It would improve your chances, but the cost for these is nearly 10k plus legal costs.
Since 7 years has passed and no known contact from the IRS, the chances are good that they will not discover this now, however there is no statute of limitations under which you become home free after a certain number of years. So this could be constant concern you would have to deal with.
The first decision is whether to take that risk or come forward and try to get the best arrangement you can without shelling out for a PLR. You might be able to get the account re titled and the RMDs brought up to date without having to file for a PLR, but that options remains open to you.
Note that when you take those RMDs, they will be taxable to you in the year of the distributions. There is no early withdrawal penalty after the account is titled as inherited, but if you took out money from the account now without re titling it, there would be a 10% penalty until you are 59.5.
I would start with getting the account titled properly if you want to try to restore the account to where it should have been over the last 7 years. Don’t know if your mother has access to any additional documentation regarding past events relative to the account. Obviously, if the advisor did not mess this up, someone else did and if they are professionals you might have recourse against them for damages, which would be an accelerated tax bill and loss of your ability to stretch this over your lifetime.