inherited IRA minor
I have a client who passed away age 45 he listed his son as beneficiary for his 401k. The son is 13, we are looking to roll into an Inherited IRA using his mother as custodian. Will we need to start taking distributions based on the son’s life expectancy and then at age 18 would it start the 10 year payout window. Thanks..
Permalink Submitted by William Tuttle on Sat, 2021-09-25 02:11
Unrelated to the inherited retirement account, you should be aware that in most states. When a minor is directly named as a beneficiary of a substantial financial account. A property guardian is generally appointed by the court. The court will maintain supervision and control until age of majority. This is far different that a UTMA account with a custodian and little if any supervision.
Permalink Submitted by Bruce Steiner on Sun, 2021-09-26 23:22
Guardianships are cumbersome in many states. Check whether that’s the case in the applicable state.Check the Uniform Transfers to Minors Acts of the states where the minor lives, where the proposed custodian lives, and where the payor is located. Most states allow payors to pay to a custodian under the Uniform Transfers to Minors Act, though some states have a cap on the amount. Another possibility is to do nothing and let the minor claim it at 18 and ask that the penalties on the missed distributions be waived. At age 13 even if the IRS won’t waive the penalties they won’t be very much, and likely less than the cost of a guardianship.
Permalink Submitted by Alan - IRA critic on Sat, 2021-09-25 02:16
If client passed this year, the mother will have to start beneficiary RMDs using the child’s life expectancy and Table I in 2022. The year the child reaches the age of majority in his state is the final year of LE RMDs, and the 10 year rule kicks in starting in the following year. Annual RMDs cease in the year following his reaching majority, but the account must be drained in the year he reaches 28.
An exception exists if the child is pursuing a secondary education program, and the LE RMDs continue while qualifying for the exception, and the 10 year rule then kicks in for the year following the year the exception ends or age 26 at the latest. Full Regulations have not yet been publishe defining the requirements for the higher education program.
Once the 10 year rule starts, there are no IRS Regs determining what happens if the child, before reaching 26 starts a qualified secondary education program, so there is much to be defined by the IRS before this provision is totally clear.
Remember that distributions to the child can trigger the kiddie tax.
Permalink Submitted by ssel on Sun, 2021-09-26 02:15
Alan, you use the phrase “qualified secondary education program”. The statute uses “a specified course of education”. Do you know for sure that college does not count?
Permalink Submitted by Bruce Steiner on Sun, 2021-09-26 23:24
We don’t yet know what qualifies as a “specified course of education.” For example, what if a beneficairy takes a gap year between high school and college, or works for a couple of years between college and an MBA program, or joins the military or the Peace Corps.However, since the age 26 cap prevents abuse, I would expect the regulations (when they come out) to be liberal on this.
Permalink Submitted by William Tuttle on Sun, 2021-09-26 02:46
Not to speak for Alan, but maybe he meant “qualified post secondary education.” That is the term the IRS uses to describe higher education eligible for various other tax credits, deductions and advantaged accounts.
Permalink Submitted by Alan - IRA critic on Sun, 2021-09-26 02:48
SInce there has been no clarification from the IRS what is meant by “a specified course of education” and there is also no general consensus what it means, such beneficiaries are currently in the dark with respect to when the 10 year rule will kick in. I would assume that college would certainly be included, but who knows what else. It might include additional courses needed to get the beneficiary through high school.
Permalink Submitted by ssel on Tue, 2021-09-28 02:43
Thanks, everyone. Alan, note that the term “secondary education” refers to middle school (or junior high) and high school, but excludes college. How long do you suppose it will be before we have some clarity on this? There must already be at least a few people who need to know now if they qualify.
Permalink Submitted by Alan - IRA critic on Tue, 2021-09-28 04:26
Yes, I should have used the term “post secondary education” as that is what I meant.
The IRS was hit with massive year end tax bills in recent years. On top of that the Secure Act had just been passed when Covid hit an already short handed IRS. The CARES Act followed Secure within 3 months and due to pandemic related relief being critical, it soaked up much IRS attention along with all the tax rebates. So whlle Secure Act guidance would ordinary have been high priority, we are still waiting. It would be prudent for those who think they qualify to take LE RMDs as if they were EDBs as these are not in conflict with the 10 year rule. That provides more time for the IRS to get these late Regs released.