Non-Spousal Inherited IRA

Submitted by Brian Desiderio on Tue, 2022-11-29 22:55

Four kids will be inheriting an IRA from their father and will be divided equally. He passed after his RBD but didn’t take his RMD for 2022 so they will need take their share of his RMD for 2022. I want to confirm my understanding about a few issues. Does a new IRA account need to be established in their name or can each account be established in the name of the father where they are the beneficiary the account or does it need to be in their name? Also, if one doesn’t have an IRA account already, can they contribute the RMDs into a newly established IRA thereby offsetting the RMD distribution and distributions that are required to be made over the next ten years? That way a lump sum is circumvented and any additional tax incurred.



Submitted by Alan - IRA critic on Tue, 2022-11-29 23:38

  • They will each need to establish their own inherited IRA showing them as beneficiary of father. Both names must appear on the inherited IRA title. Each custodian may have their own required title format, all of which are acceptable to the IRS. 
  • They collectively must complete father’s 2022 RMD in any proportion. Often one or two might want to take a distribution large enough to complete the RMD, in which case the others would not need to participate. Of course, this takes communication and coordination. If any of the beneficiaries are not communicating, then the others need to take out at least their pro rata share of the year of death RMD.
  • Most important, any distribution made to a beneficiary cannot be rolled over to any other IRA account, owned or inherited. A distribution will be taxable with no recourse. If a beneficiary prefers to change custodians in the future, it must be done by direct trustee transfer.
  • Each kid will be subject to the 10 year rule, but because father passed after his RBD, they will have to take annual RMDs in years 1-9 and drain the account no later than the end of year 10  (2032). Their annual RMDs can be based on each of their respective ages attained in 2023 if separate inherited IRA accounts are created no later than 12/31/2023. 
  • There is no way to avoid taxes on the annual RMDs or any other distributions. If a beneficiary wants to avoid a large tax bill in year 10, they may need to take distributions each year that are larger than the RMD amount.

Submitted by Brian Desiderio on Fri, 2022-12-02 16:13

Thank you for your post.  I should have been more clear about the issue of “rolling over” the RMD. What I meant to convey is that the daughter, if eligible, may make an IRA contribution to her own IRA which will effectively negate any tax owed, assuming the amount of contribution is at least the same amount of the RMD.  Based on my research, there is no prohibition from her making her own IRA contribution in the same year she received the inherited RMD.  If I am incorrect, please share an irs cite that specifically prohibits her from doing so.  Thanks again.

Submitted by Alan - IRA critic on Fri, 2022-12-02 16:31

  • Yes, she can make a regular IRA contribution as long as she has earned income to do so. Deductibility rules apply and this regular IRA contribution is not affected by the beneficiary RMD, other than the beneficiary RMD will increase modified AGI and if large enough could eliminate the deduction for her new regular IRA contribution.
  • If father had any basis in his IRA (reported on Form 8606), each child inherits a pro rata share of his remaining basis at death. They would then file an 8606 for their inherited IRA distributions showing their share of basis on lines 2 and 3, which would result in a portion of the RMD being non taxable upon completion of the rest of Part I of the 8606. 

Submitted by Kimberly morgan on Wed, 2023-11-01 00:08

So do the inherited IRAs have to open an initial inherited IRA at the institution where the original IRA was held before they do a trustee to trustee transfer to another instituion?  Or can it be transferred to another institution as an Inherited IRA directly from the original IRA owner’s IRA? 

Submitted by Alan - IRA critic on Wed, 2023-11-01 01:53

An extremely small number of IRA custodians would allow such a transfer. The vast majority will require the inherited share to be transferred to a new inherited IRA account under the SSN of the beneficiary before the balance can be transferred from that custodian to a new custodian. Custodians do not want to have more than one SSN as the owner or beneficairy per account. Consider the confusion this could create when there are multiple beneficiaries for a deceased IRA owner.

Submitted by timothy corrigan on Wed, 2022-11-30 04:30

My mother was taking RMDs and took an RMD in 2020 prior to her death.  I understand that the penalties for not taking RMDs from this account for 2021 and 2022 have been waived by the IRS.  In terms of planning, I imagine I will need to take a cumulative RMD from this IRA in 2023 (meaning the 2021 and 2022 RMDs).  Am I able to pay the taxes and make a contribution to my own Roth?  Or do I just need to back door the Roth?  I suppose I could take an RMD in 2022 still and use that cash to do a back door Roth.  I have a month to act.  Thank you for your help!

Submitted by Alan - IRA critic on Wed, 2022-11-30 15:23

While a cumulative makeup RMD for 2021 and 2022 is possible, it is  unlikely that the IRS will require it. They will probably settle for the RMDs to start up in 2023 with the 2023 RMD only. This will be a taxable distribution to you. What type of IRA contribution you make to your own IRA is totally independent of the inherited IRA situation. You will need to have earned income (or spousal earned income) in order to contribute. And your income may be too high to deduct a TIRA contribution or make a regular Roth contribution. You have  until 4/15/2023 to determine which type of contribution you can make for 2022. You would not be doing a back door Roth unless your modified AGI this year is too high for a regular Roth contribution.

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