Inherited IRA transfer

Submitted by Betty Kendra on Tue, 2023-01-24 15:09

I have someone who as an adult child inherited a traditional IRA from the parent under Secure 2.0 RMD rules, elected the 10-year distribution and started a 5-year CD at a very low interest rate. She now wants to transfer the inherited IRA to an income annuity with a higher payout. The annuity will zero the account by the 10th year. She was advised by the bank that she would have to sign new paperwork changing her election to a lump sum and the bank will issue a cashier’s check that she could then turn over to fund the income annuity within the 60 day window. I know a 1099-R will be generated for the distribution.

Two questions, once new paperwork shows a change from 10-year to lump sum distribution, is she eligible to take the lump sum and reapply it to a new inherited IRA or will the IRSconsider the inherited IRA distribution complete? Also, what documentation will she need to prove the lump sum was rolled over to another inherited IRA so it is not taxable?



Submitted by Alan - IRA critic on Tue, 2023-01-24 16:31

Did parent pass prior to RBD or after?  If after the child must take annual beneficiary RMDs starting this year. Further, any distribution generating a 1099R will be taxable as no 60 day rollovers are allowed for non spouse inherited IRA beneficiaries. A non reportable direct transfer to an annuity IRA is the only way to move the funds into that  product. 

Submitted by Betty Kendra on Tue, 2023-01-24 19:38

parent passed after RBD in 2020. RMDs were taken in 2021 and 2022. To be clear, the proceeds check cannot be redposted into a new inherited ira? Is there any other method to accomplish the transfer?

Submitted by David Mertz on Wed, 2023-01-25 00:35

  • Bank personnel are frequently ignorant of the difference between a distribution-and-rollover and a trustee-to-trustee transfer and think that every movement of an IRA must be treated as a reportable distribution and a reportable rollover (which is not permitted in this case).  In most cases the IRA should be actually moved by non-reportable trustee-to-trustee transfer and is the only permissible option in this case. 
  • A trustee-to-trustee transfer can be done by a check made out specifically to the receiving IRA at the new financial institution.  No Form 1099-R is to be issued by the old custodian and no rollover contribution is to be reported on Form 5498 by the new custodian.  Any forms of the custodian initiating the transaction must indicate that the transaction is a transfer, not a distribution.  (On several occasions I’ve had to persist in instructing the bank personnel on how they must prepare their own form.)
  • If the transfer is done by check made out the new IRA, the check can either be mailed by the old custodian directly to the new custodian or the check can be given to the IRA beneficiary for delivery to the new custodian.  Because the transaction is neither a distribution nor a rollover, there is no 60-day deadline to deposit the check into the new IRA, but there is no good reason to delay doing so.
  • It’s usually safest to initiate the transfer at the receiving custodian so that they can provide to the old custodian the identifying information of the IRA that is to receive the transfer and must appear on the check.  Again, it’s important that both custodians know that this is a trustee-to-trustee transfer, not a distribution-and-rollover.

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