Question on cashing out CDs in an inherited IRA

Submitted by Gary Townsend on Tue, 2013-10-29 16:10

Hi Everyone,

My brother and I inherited a traditional IRA in 2011 when my Mom passed away (split 50/50). This was held at US Bank and was invested in 5 CD’s of various maturities. They were all earning about 4%, so we set up Beneficiary IRAs for each of us and we’ve let it chug along in those CDs (they split each CD 50/50 for us and let us keep those nice rates). We both elected to take RMDs over our respective life expectancies, as we don’t need the cash right now.

Well, those CDs are now coming due, and as I’m sure everyone knows, rates are next to nothing right now. I stopped in at the branch this morning since I’m looking do something different with these funds. I will ultimately transfer mine to Wells Fargo Advisors since that’s where I have my investments, and I know to title it correctly and do it as a trustee to trustee transfer when I do. My problem comes from how they are telling me I need to close these CDs.

They told me they would waive the early withdrawal penalty if I put them in an IRA Money Market account. From there I can do what I want with them with no penalties. That’s a nice thing, and I’m not complaining. When they gave me the paperwork to sign is when I started getting nervous.

They gave me an IRA distribution form exactly like the one we completed when my Mom died. It lists my Mom as owner (no mention of me as beneficiary), and has me as the recipient, says the distribution reason is due to death and they’ve checked boxes for immediate distribution with the payment method marked down as “money market”. They’ve also checked the no withholding box. I’m afraid to sign this even if they correctly title the new account as Gary TXXXXX ABO Patricia TXXXXX since there’s nothing noting this is actually a transfer.

Wouldn’t it be more appropriate to put the name as Gary TXXXXX ABO Patrica TXXXXXX like the current IRA is titled, and then check the box for “Transfer to another IRA”? I had all sorts of problems with them getting things straight when my Mom passed away (Mom had rolled over an RMD prior to her death and getting them to fix that was a nightmare), and I’m not comfortable at all with their knowledge in this area. They said they have to open a new account to get out of the CDs and into the money market, which is fine – I’m just concerned about how they’re doing this and don’t want a tax nightmare because something got done wrong.

I will not get a check – they’ll transfer the funds directly from the CDs to the MM, I just don’t want a paperwork mistake to cost me a lot of tax money.

Any help or pointers would be appreciated.

Thanks,

Gary



Submitted by Alan - IRA critic on Tue, 2013-10-29 16:56

You are wise to be very wary of signing anything that will produce a distribution, since a distribution would be taxable with no possibility of a rollover. What it boils down to is that you want to get their assurance there will be no 1099R issued for either the investment change to a MM fund OR when you request a TtoT transfer from the bank to Wells. If they issue a 1099R, the only fix is for them to rescind the form. You cannot appeal this error to the IRS, all you could do is proceed against the bank for your damages. The IRA title format on their form further suggests they are treating this as a distribution.You may need to elevate the issue to their IRA specialists rather than rank and file personnel. Perhaps they just gave you the wrong form. As for withholding, naturally it should be -0- or “Not Applicable” in the case of a TtoT transfer. Most banks would have had a separate IRA account for EACH CD, but having a single IRA account does concentrate the potential erroneous processing exposure.

Submitted by Gary Townsend on Tue, 2013-10-29 17:39

Thanks Alan.  A couple quick items. 

  • The branch manager called the IRA department and they’re the ones that walked her through completing this form. I will circle back with them.
  • There are separate accounts for each CD, but they are grouped underneath one IRA “package” as they refer to it. You’d think they would just put the MM under that IRA “package” and be done with it, but they say they can’t do that.
  • I will transfer to Wells by having Wells initiate the transfer. They’ve already set up a correctly titled IRA for me – I just need to get things straight at US Bank to avoid the penalty on the CDs (which is apparently going to be more work than I had anticipated).  I had always heard better to start these things at the receiving institution to avoid problems.

Thanks, Gary 

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