Inherited IRA through Family Trust
Randy inherited a portion of his Father’s IRA (died before age 70 1/2), by being a named benficiary of the Smith Family Trust. Randy’s sister was the trustee and she distributed the IRA assets to the beneficiaries on July 3, 2012. Is it possible for Randy to now roll his portion of the distribution into an inherited IRA at this point? Thank you.
Permalink Submitted by Jose Morales on Thu, 2012-08-23 16:16
Hello,
The option to rollover the funds either to an inherited IRA or an IRA in their own name is only available to a spouse beneficiary. If the funds have been distributed as you say, Randy will have to report the distribution as income when filing his taxes.
Permalink Submitted by Alan Spross on Thu, 2012-08-23 18:14
Perhaps the IRA was small. Otherwise, his sister made a big mistake. If a professional trustee made this error, there might be recourse, but probably not for a family member. I suppose this distribution occurred with her own share as well?
One of the pitfalls of leaving an IRA to a trust or estate is that in some cases the trustee or executor makes an error that the beneficiary would not have made had they inherited the IRA outright. Of course, there will also be many cases in which a trustee will avoid errors that the individual would have made on their own.
I wouldn’t be surprised if this “no rollover” rule for non spouse IRA or QRP beneficiaries is changed at some point, but until that time the IRS provides no exceptions whatsoever to this requirement.
Permalink Submitted by TERRY GRAHAM on Thu, 2012-08-23 18:33
Thank you both for your replies. It was a fairly large IRA and it was distributed to everyone on July 3rd (including the Sister Trustee). You’ve both confirmed that Randy is stuck with paying tax for 2012, something he had hoped to avoid. Thanks again.
Permalink Submitted by Jose Morales on Fri, 2012-08-24 16:27
That is a real shame. Hopefully the IRS will one day have a change of heart and allow non-spouse beneficiaries to rollover funds to an inherited IRA. I know that as an IRA Custodian I am never supposed to give financial advice, but that doesn’t mean that I can’t try my best to make sure an IRA Beneficiary understands all of the beneficiary options and what the consequences of each one is. If I see a potential mistake, I speak up and make sure the client really understands what they are doing.
Permalink Submitted by Herm Brames on Mon, 2012-08-27 01:44
A reply to this post states: “If there are any Conversion amounts distributed from a ROTH IRA, they would be subject to a 10% penalty until the Conversion has aged 5 years. Each Conversion has it’s own 5 year aging process. The Conversion amount would come out tax free”.
Is that statement accurate? Will each of my past 10 years of Conversions have their own 5 year time requirement for a penalty free distribution? If the answers are “yes”, is the requirement also applied to my primary and contingent beneficiaries when/if they inherit my Converted ROTHs prior to the 5 year period on several of my last TIRA to ROTH Conversions? Lastly, who tracks the 5 year Conversion timetable, a $50,000 annual Conversion for each of 4 years redeemed prior to the 5th year anniversary would incur a penalty of $20,000 but how would a beneficiary know that fact prior to redeeming?
I have read and re-read Ed Slott’s books on IRAs and have found no reference anywhere to the subject requirement although he strongly advocates for Conversions.
Permalink Submitted by Alan Spross on Mon, 2012-08-27 03:16
I don’t see that quote in this particular thread, but the 5 year holding period for Roth conversions does not apply after age 59.5 for the owner, and does not apply after the death of the owner either. Therefore, your beneficiaries will not be subject to an early withdrawal penalty for any distributions they take no matter when they take them.
However, there is a different 5 year holding period to determine when your Roth earnings become tax free. This one is measured from the first year an owner makes any type of Roth contribution and continues after the owner’s death. Before this 5 year year holding period is attained, distributions of earnings are taxable, including those to a beneficiary. However, before this 5 year holding period has been met, the earnings will come out last, so only beneficiaries that quickly drain the inherited Roth would get to earnings before the 5 year holding period has been attained. Therefore, the beneficiaries will have to know the year the owner first made a Roth contribution. If the owner leaves a documented Roth file or keeps the 5498 forms issued for all contributions, that year will be evident.
Permalink Submitted by Herm Brames on Mon, 2012-08-27 15:21
Thanks for the clarification Alan. The Post I should have referred to was an August 23rd response to the Topic: 38 year old with ROTH IRA. The response was specific to a 38 year old and hence my misunderstanding
Permalink Submitted by Bruce Steiner on Wed, 2012-08-29 02:10
It’s usually the other way around. A trustee is less likely to withdraw the entire IRA immediately than an individual.
Randy may wish to consult with counsel as to whether he may have a claim against the trustee.
The Administration’s Revenue Proposals for fiscal year 2013 contain a proposal to permit nonspouse beneficiaries to roll distributions over to an inherited IRA within 60 days, effective for distributions made beginning in 2013. However, this proposal has not yet been enacted, and there is no way to predict whether it will be enacted.