Inherited an Inherited IRA

Submitted by Fred Waltman on Tue, 2017-08-29 00:02

My father had two IRAs at Vanguard. When he passed, my mother assumed one and inherited the other (why this was done nobody knows). My mother recently passed and my two brothers and I are trying to figured out the rules for RMD. The IRA that my mother assumed — and we now inherited — seems relatively straightforward. Both were over 70 1/2 when they died.

My mother was talking RMD from the inherited IRA based on the single life expectancy table and her divisor for next year would have been 7.1.

If the IRA had been inherited from a non spouse (say, her brother) then it seems to be clear we would be starting with the 10.2 divisor the year she inherited it and subtracting 1 each year for the 6 years since, giving us a divisor of 4.2 (and depleting the IRA in 5 years). But since she inherited the IRA from a spouse, I am unclear. I see three possibilities (and I’m sure there may be more)

1) We use the 4.2 divisor and subtract 1 each year.
2) We use the 7.1 divisor she as using and subtract 1 each year.
3) We continue using the table each year: 7.1, 6.7, 6.3, etc.

At this point, I don’t even know where to ask. My CPA is not well versed in this subject. Vanguard suggested calling the IRS and asking them, which I will do when I have to be on hold forever.



Submitted by Alan - IRA critic on Tue, 2017-08-29 00:53

  • The inherited IRA RMD is complex and the situation needs to be reconstructed from the beginning. First, if your father was younger than your mother, she could have used HIS remaining life expectancy for her beneficiary RMDs with a 1.0 reduction each year until until the divisor became lower than her divisor based on her age that would not be reduced by 1.0 each year as a sole spousal beneficiary. In other words, it is possible that the age used to determine her divisor could have changed during the 6 year period. Whatever would be the correct divisor for her beneficiary RMD for 2017 would then be reduced by 1.0 for 2018 and each year thereafter.
  • In addition to the above, there is a default rule that states that if your mother failed to take her full beneficiary RMD for any year after she inherited, she defaulted to ownership status for determining her RMDs. Therefore, you need to determine her actual divisor based on the above for each year, and then check to see if her RMD at least met that amount. If she fell short, that is a big break for you because you would then be a designated beneficiary of that IRA and could use your own life expectancies for RMDs giving you a much longer distribution period. 
  • So you cannot tell if she fell short in any year unless you know the correct beneficiary RMD for those years. Once you know the correct beneficiary RMD you can determine if she fell short of that and defaulted to ownership status in that year. It does not matter that the IRA remained titled as inherited after defaulting to ownership. It only matters if she actually did default to ownership. 
  • Your choices 1 and 3 are incorrect. Choice 2 may or may not be correct depending on reconstruction of the prior RMD activities.
  • If you call the IRS and talk to 10 different people with this question, I would be very surprised if even one factored in ALL of the necessary variables. 
  • Mother was responsible for completing father’s year of death RMD if he did not complete it. The 3 of you are responsible for completing your mother’s 2017 RMD (I assume she passed in 2017 and had named the 3 of you as 1/3 beneficiaries on BOTH of these IRAs) if she did not complete it. 
  • The above findings also determine if the 3 of you are able to combine these into a single inherited IRA account. Your mother would have had to default to ownership for these to be combined, otherwise they would continue to have different divisors each year. So each of you would end up with either one inherited IRA or two, most likely two.  
  • I believe if you called the IRS and talked to 10 different agents with this question, I doubt if any of them would pick up on all the variables that could apply here.
  • For the owned IRA, if you were all named as beneficiaries you are all designated beneficiaries, and if you create separate inherited IRA accounts no later than 12/31/2018 you can each use your single life expectancy based on your ages on 12/31/2018 to determine your 2018 beneficiary RMD. DIvisor reduces by 1.0 each year thereafter. If your mother did not complete her 2017 RMD before passing you are JOINTLY responsible for completing her 2017 RMD. That means if ONE of you needs the money that person could take out the entire year of death RMD and the other two would not have to take out anything for the year of death RMD.
  • Is there any tax basis in either IRA from non deductible contributions?  If so, Form 8606 should be on mother’s recent tax returns to calculate the taxable amount.

Submitted by Fred Waltman on Tue, 2017-08-29 01:52

  • My mother was younger than my father by about 18 months. He passed just shy of 80 and she passed at 85.
  • IRA #1, the one my mother assumed, she did meet the RMD for this year and was split into 3 accounts (one for each of us) titled “MyName Befen MyMother”    
  • IRA #2, the one she inherited (on paper) she did not meet the RMD for this year and that has been taken care of. It has been split into 3 accounts titled “MyName Benef MyFather” 
  • On both, I believe she specified the beneficiaries to be her children, split equally (i.e. did not name us individually) — don’t know if that is important.
  • If you had asked me yesterday I would have said she had taken all her RMD but I see that it may be more complicated than I thought. Both were handled by Vanguard, if that makes it more or less likely that things were done correctly.
  • I will have to double check but I don’t think there was non deductible contributions in either IRA.
  • It sounds like the least complex solution would be for us to just take the IRA over 5 years and be done with it. I would rather spread it out but I don’t want to run afoul of the powers that be.

 Thank you very much for your help.

Submitted by Alan - IRA critic on Tue, 2017-08-29 15:18

  • That eliminates use of father’s age for mother’s beneficiary RMDs. Her age at the end of the year following the year of his death applies, and it sounds like that is what was done.
  • Point 2 – agree
  • Point 3 – The IRS prefers that for a second time inherited IRA, the name of the original owner be dropped. Therefore, it should read “your name, beneficiary of (mother)”. However, this is not critical and you can leave as is for now.
  • Point 4 – not necessary for her to have listed names. You are still considered designated beneficiaries of the IRA she owned, and successor beneficiaries of the one she maintained as inherited.
  • Point 5 – looks like more research is required, but if you find that in any year she fell short of her beneficiary RMD amount, she defaulted to ownership. Therefore, your research should start with her first beneficiary RMD year. It sounds like the correct divisors were used (Table I entered each year for new divisor), so you are probably looking for a year in which no beneficiary RMD was distributed due to oversight. If she used Vanguard’s RMD service, probably less of a chance she missed an RMD. Look for a 1099R with her tax records showing the inherited IRA account number.
  • If no 8606 shows on any of her tax returns or joint returns for the last couple years your father was alive, you can just assume the IRAs are entirely pre tax.
  • Last point – you can accelerate distributions in any amount you wish, but the 5 year rule which allows you to take less or 0 in any year until the 5th year cannot be used. You would still have to take not less than the actual beneficiary RMD each year in each year. If 7.1 applies for 2017 you could reduce by 1.3 each year instead of by 1.0 and that would liquidate it by the end of 2022.

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