Inherited IRA
Looking for some advice in regard to an Inherited IRA
Decedent was born 5/14/45 and died 7/4/18
The estate was named beneficiary.
The estate has been settled by court order and now they are preparing for distribution of estate.
Beneficiary DOB is 2/8/57
We have already set up an Inherited IRA account at Schwab to receive these funds w both the decedents name FBO of beneficiary.
The problem… the custodian of the deceased IRA just cut a check made payable to the beneficiary are mailing it to us and said we have 60 days to roll it over. So first question is should we accept this check? We don’t want to create a taxable event.
They had been asked to wire transfer the money to the new Schwab account as titled above and to provide us with a breakdown of the contributions and distributions so we could see if the contributions were before tax or after (she had a traditional IRA)
They did not honor our two requests. We think we need some proof that the Estate made the required minimum distributions along the way since decedent died.
We would also like clarification on the distributions the beneficiary needs to take once the money is in his inherited IRA.
From what we have read, since decedent died prior to 2019, then he qualifies under the “stretch IRA” guidelines that allow him to take income from the ira indefinitely so long as he takes minimum distributions over his life expectancy. Can you confirm if we have that right?
Thank you!
Permalink Submitted by Alan - IRA critic on Fri, 2022-04-08 01:43
Why did that custodian issue a distribution check? They were not authorized to make a distribution unless the executor or beneficiary after assignment out of the estate requested a distribution. This check is not eligible for rollover and should be returned with instructions to void it and return the funds to decedent’s IRA so they can be directly transferred to the Schwab inherited IRA. If anyone in authority mistakenly requested a distribution, there will not be any way to avoid a lump sum taxable event.
If RMDs are behind or if the year of death RMD has not been distributed, it is the responsibility of the beneficiaries to bring them current. It is not the responsibility of this custodian since this is not a qualified plan.
The custodian has no idea if the IRA they held has basis. That will have to be determined from a review of the decedent’s tax records and returns.
Since decedent passed after his RBD, the IRA must be distributed over the remaining single life expectancy of the deceased IRA owner. With the estate as beneficiary, the estate beneficiary’s age cannot be used, so your final paragraph is incorrect. For 2018, the balance of decedent’s RMD must be distributed to the extent that decedent did not before passing. A 2018 5329 must be filed if late, and also separately for any later year shortfalls. The 2019 RMD divisor is 13.8. 2020 RMDsw were waived by the CARES Act. The 2021 RMD divisor is 11.8. The 2022 RMD divisor using the reset life expectancies is 12.4. Assignment of the IRA out of the estate to the estate beneficiary does not change the distribution period, but it does allow the estate to close.
But that distribution check is a serious potential problem.
Permalink Submitted by caroline ure on Fri, 2022-04-08 14:38
So appreciate your quick response! Am wondering if it would be best for the estate to cash in the IRA and do the RMD catching up, if applicable, and filings and pay the tax at the estate level and send us the proceeds tax free? We are middle income folks and we thought we understood that the estate would pay a tax at abt 37% which exceeds our tax bracket, so that is why we opted to have it sent intact to us. But since they are not handling the contribution/distribution questions professoinally, maybe it would make sense to have the estate cash it in?
Permalink Submitted by Alan - IRA critic on Fri, 2022-04-08 15:47
If the check was made out to the beneficiary of the estate directly, then the beneficiary cashed out the IRA, not the estate. The 1099R would be issued to the beneficiary under beneficiary’s SSN. Taxes would be due at the beneficiary’s personal tax rate for 2022. If this distribution check was NOT requested and can therefore be returned to the custodian as a custodian error, it will save the check payee significant taxes unless the IRA balance is very modest.
If the check cannot be returned and was payable to the estate, that does not mean that the estate will pay taxes at the high rate. The taxable income can be passed through to the estate beneficiary on a K 1after filing a 1041 (income tax return of estate). The beneficiary would then pay the tax, again at their personal tax rate, but if the amount is large it will certainly spike the beneficiary’s tax bill for 2022.
The estate would still have to file the 5329 forms to have the IRS waive the very high late RMD penalty (50% of shortfall). The IRS will most likely accept the request.
Permalink Submitted by caroline ure on Fri, 2022-04-08 17:37
Thank you very much!