IRA Options

Submitted by Ken Habicht on Fri, 2018-02-09 19:16

My dad just passed away in January and he just turned 71. We have not found out yet if there is a beneficiary listed but if not, will it go to his estate? Does the IRA then get cashed out to the estate and is there a penalty in doing that?

Since no RMD’s have been taken yet, does the 5yr rule apply? Are there penalties for taking more than the RMD per year?

thanks,

Ken



Submitted by Alan - IRA critic on Fri, 2018-02-09 20:05

  • Sorry to hear of your loss. Since Dad passed PRIOR TO his required beginning date for RMDs, if his estate is the beneficiary the 5 year rule will apply. The estate executor can assign the inherited IRA to the beneficiaries of his will, who will be subject to the 5 year rule. That means no RMDs are required for any particular year but the inherited IRAs must be drained no later than 12/31/23.
  • Since there are no RMD deadlines close by, assuming that the estate can close this year, each will beneficiary would receive an inherited IRA account and they could spread out distributions as they wanted to. Generally, for tax reasons they would usually not want to wait and take out the entire amount in the final year as that could spike their tax rate that year. Each beneficiary should also name their own successor beneficiary as soon as they receive their inherited IRA.
  • If the IRA custodian suggests making a lump sum distribution to the estate as many are inclined to do, the executor should decline that since it would cause the entire amount to be taxable right away. The executor would pass through that taxable income to each will beneficiary.
  • If there is NO WILL, then the state intestate provisions will determine the beneficiaries.
  • There is no limit to the amount than can be withdrawn. The only penalty would be for any inherited IRA not being drained by the end of 2023.
  • Almost all IRA agreements specify the estate as the default beneficiary if no beneficiary was listed. Some might specify a surviving spouse if there is one.
  • Hopefully, beneficiaries were named on the IRA. If so, individual beneficiaries would be able to stretch the IRA over their single life expectancy, and should create separate inherited IRAs no later than 12/31/2019.

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