Inherited IRA and MRDs
I am 61 and “retired” and no longer making contributions to my IRAs since I have no “earned income”. Not sure I would make more contributions even if I had earned income. I am living off my “defined benefit pension”, “wife’s salary” as she chooses to continue to work, and “interest & dividends” from non-tax defered savings. I plan to file for Social Security next year at age 62, mostly because I am afraid of a “rule change” to SS. So I want to get “grandfathered in” if that is possible. My SS will be fully taxable which I understand is currently at 85% of benefits.
I have both my IRA’s (TDAmeritrade & Interactive Brokers) set up upon my death to go:
Wife (54) 1/2
Kid 1 (27) 1/6
Kid 2 (23) 1/6
Kid 3 (23) 1/6
MY question is about MRDs. I understand I will have to begin MRDs at 70.5 at 1/24 the amount of my IRAs.
Q1 Is that correct?
Q2 What happens to my surviors if as I assume I go first.
Any other comments on strategy would be welcome.
TIA
SeattleSun
Permalink Submitted by Alan Spross on Tue, 2008-07-01 03:13
1) Close. It’s actually a bit less than 1/24, depending on your attained age as of 12/31 in the year you reach 70.5. If it’s 70, your divisor is 27.4 and if 71 your divisor is 26.5.
2) Your wife can roll over her share to her own IRA and then take RMDs using her own age. The children can create separate inherited IRA accounts of their own by direct transfer (NOT by rollover) and then take RMDs using their single life expectancies. They must create the separate accounts no later than 12/31 of the year following the year of your death.
Should you pass prior to your wife turning 59.5, she can maintain her interest as an inherited IRA until she reaches 59.5. That way her distributions would escape any early withdrawal penalty.
I would not file for SS at 62 strictly because you fear a change in the law. Any changes would not affect anyone as close to benefits eligibility as yourself. Of course, you may need the funds or have a family history or health situation that suggests a limited mortality period. In that situation and considering your wife’s survivor benefit, you may wish to file early. Your benefit reduction at 62 is 25%.
Permalink Submitted by Richard Rea on Tue, 2008-07-01 03:34
Alan,
Thanks. It has been a few years since I posted here but see your still the ‘answer guy’.
“The children can create separate inherited IRA accounts of their own by direct transfer (NOT by rollover) and then take RMDs using their single life expectancies.”
Man this stuff sure gets complicated. I am not sure the wife or kids could every do it without screwing it up. Would the IRA custodians (TDAmeritrade & Interactive Brokers) just do it automatically upon death? I probably will be moving to one custodian or IB at some point in the future.
A little hot down there in AZ?
SeattleSun
Permalink Submitted by William Tuttle on Tue, 2008-07-01 03:35
One small point. Even though you indicated that you are not sure you would contribute to your IRAs even if you could. You might be able to. If your wife’s income is sufficient to support any contributions she might make, and leave enough over for any contributions you choose, you are allowed to make a contribution based on your wife’s “earned income”
Permalink Submitted by Alan Spross on Tue, 2008-07-01 04:19
An IRA custodian is not going to do anything automatically, and that is probably a good thing. However, the larger firms can offer some good advice upon request.
One suggestion is to have a current IRA file that the appropriate party can easily locate at the proper time. That file should contain basic instructions and choices for your beneficiaries. You could update these instructions upon attainment of certain age thresholds, eg once you spouse reaches 59.5, there is no need for her to consider maintaining an inherited IRA interest rather than rolling her share into her own IRA. If you happen to have any basis from non deductible contributions, your unrecovered basis will go to your beneficiaries at your death and result in some of their distributions being tax free.
It is also good to make sure your IRA custodian has the same beneficiary record that you do from time to time. When accounts are changed due to various transfers, the beneficiary designation can be inadvertantly changed or omitted. If you have on line access to your beneficiary designation, making an occasional copy it with a date indication is helpful.