Inherited ira

Submitted by Ed Dominica on Sun, 2013-12-15 20:49

My wife just found out she inherited an IRA from her dad, who died in 2002 at age 54. Why we just found out now is still a mystery. Although my wife was his only child and her dad was not married when he died, her aunt was executor of the will. Looking back on it now we should have asked to see the will but we were pretty young at the time and my wife never did have a great relation ship with him or her aunt. Anyway we just received certified letter from a financial advisor from California where he lived telling us that my wife is a beneficiary to his ira and get in contact with him for disbursement options. We live in PA by the way and at the same address for for 17 years, it’s not that hard to find us. Plus he sent us stack of paperwork to fill out. After spending the weekend doing research I think I know what questions to ask to figure out what to do. I thinking if it’s just a small amount, we pay the penalties and not worry about it. We are little unsure what to do if it is a large amount.
Can anybody give us some guidance?



Submitted by Alan - IRA critic on Sun, 2013-12-15 22:06

  • This all sounds a little strange, so she should proceed with caution in case this is a scam. FIrst thing to watch for is a request for money for expenses or some other reason. The paperwork obviously requests your wife’s personal info including her SSN. What information is provided to her now, eg was she listed directly as the IRA beneficiary or was her dad’s estate the beneficiary of the IRA? 
  •  If legit, and the amount is large enough to warrant, your wife may be able to preserve her stretch by making up all the missing RMDs since 2003, but only if she inherited directly and not through the estate.
  • If she inherited through the estate due to the estate being the named or default beneficiary, she is stuck with the 5 year rule under which she must take a full distribution of the account as taxable income. In that case, she should also request a penalty waiver by completing Form 5329 and include a copy of the letter indicating she never knew about the account. The IRS will likely waive the penalty.
  • Why is the amount not divulged in the letter. Who is (or was) the IRA custodian if the IRA has already been distributed to the estate? What is the relationship between her aunt and this advisor?


Submitted by Ed Dominica on Mon, 2013-12-16 02:13

My wife is calling her aunt. We are pretty sure now her aunt had no knowledge of this ira either. One thing I didn’t mention was that right after her dad died my wife received a life insurance check, she was the only beneficiary listed then. We do vaguely remover when he was nearing the end he called my wife and told her there was some life insurance and a retirement account and that they would contact her. The insurance people did, the ira people never did till now. She did speak occasionally with her aunt and seems to recall her saying something similar. The only thing I can think of right now is that she never knew to contact them and nobody else is listed either. This is the year he would have turned 65, they might have finally figured this out themselves.  If this is a scam, they already have all of my wife’s information. There is one form for her to sign, a one time distribution form and another form, an inherited ira form to sign. Both forms are mostly filled out with name, address, soc number, and birth dates already.  We did check on the firm, they seem to be on the up and up, we are going to try and contact them before signing and sending anything.



Submitted by Alan - IRA critic on Mon, 2013-12-16 04:15

OK, probably not a scam. She might ask them what the amount is before deciding what she wants to do. Note that once a check is made out to her she cannot roll it over, as it would irrevocably taxable. This is fine if the amount is small, but if it is large and your wife was specifically named as beneficiary on the IRA agreement  it would be best not to have all that taxable income in a single year. Again, if your wife was not named on the IRA, but this is coming through the estate, there is no option but the single distribution under the 5 year rule with the 5 years long expired.



Submitted by Ed Dominica on Mon, 2013-12-16 22:58

We called the broker today and now we are really confused. There are multiple beneficiaries and my wife’s portion works out to less than $50k. But this is not to settle an estate, she is named as a beneficiary.  We are leaning towards rolling it into the inherited ira for now. The broker told us he has been trying to get this taken care of with my wife’s aunt for several years now. Not really sure what is going on there or why she ignored this as long as she did. The broker told us that by rolling it into the inherited ira it transfers ownership, then we can decide how or if to disburse latter When we have a better idea of the tax liability/penalty. Does this sound right?



Submitted by Alan - IRA critic on Mon, 2013-12-16 23:22

  • Yes, with respect to the separate inherited IRA accounts. Each beneficiary would have to request penalty waivers separately to the IRS, make their own investment changes, make their choice of IRA custodian if they want a different one, and name their own successor beneficiaries. Because their were multiple beneficiaries and separate accounts were not established by the deadline (12/31/2003), each beneficiary must use the life expectancy of the oldest beneficiary, so your wife will have to find out the attained age of the oldest beneficiary as of 12/31/2003. Then she can determine if it is worth the effort to attempt to restore the life expectancy stretch or just take a lump sum distribution as a late distribution under the 5 year rule and request a penalty waiver from the IRS using Form 5329.
  • While it will not affect the options at this time, out of curiosity it might be interesting to determine why the inordinate delay in informing the beneficiaries? It did result in reduction of the stretch to the oldest beneficiary, the need to receive a decade’s worth of made up RMDs (which can only be done by determining the prior year end balance for each year, using the correct RMD divisor and multiplying by your wife’s % share). Once the correct RMD divisor is determined for 2003, that divisor is reduced by 1.0 each year thereafter, and skip 2009 because RMDs were waived by Congress in 2009, so reduce the 2010 divisor by 2.0 from the 2008 divisor.
  • Also note that the aunt was the executor of the will, but the will and her authority does NOT apply to the IRA if the IRA had designated beneficiaries. But that does not mean that she could not have contacted the beneficiaries and advised them to deal directly with the IRA custodian. Some IRA custodians also want to handle the beneficiaries at one time and there often are one or more that do not respond or cooperate resulting in more lost time.


Submitted by Ed Dominica on Tue, 2014-01-14 00:22

It was elected by the plan administator to make a lump sum distribution. Not sure exactly why this was chosen(time frame?) either way the account was closed as of december 31, 2013 and a check was mailed on January 6, 2014. We know to use form 5329 but can we take this as income for 2013 when the account closed or must we use it as income for 2014? I know you would usually want to delay paying as long as possible but we have significant deductions for 2013 that we will not in 2014. Plus it would be nice to know sooner rather than later if our reasons on the 5329 are accepted.



Submitted by Alan - IRA critic on Tue, 2014-01-14 01:14

There should have been no distribution unless a beneficiary requested it. You will have to wait until late this month to see if there will be a 2013 1099R issued. You will have to report it based on the 1099R. As for the 5329 forms, the IRS will respond if they reject the waiver request, but not if they have accepted it. So no news is good news, and with the lump sum distribution, you should state that with the 5329 waiver request and it will probably help.



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