Roth IRA non-spouse beneficiary
I am the executrix of my mother’s estate (she died in May 2008). Her traditional and Roth IRAs have named all 4 children as equal beneficiaries. These are NOT employer pension plan IRAs. The Roth has been fully funded for more than 5 years and was funded completely with non-deductible contributions.
I understand that I can convert the IRA into an Inherited IRA Beneficiary Distribution Account (IRA-BDA) and stretch distributions over my lifetime OR take the distributions lump-sum or within 5 years which will be considered taxable income.
I also understand that I can take distribution from the Roth lump-sum or within 5 years which will be tax-free.
1. With regard to the Roth, do I have the option to convert it also to an IRA-BDA? I don’t think I can convert it to a Roth.
2. Since the Roth was funded completely with non-deductible contributions I think I inherit the tax basis but I don’t fully understand what that means or what benefit that may provide
3. The IRAs are with Pioneer and I will be transfering my funds to Fidelity. Do I have to establish the IRA-BDA at Pioneer first?
4. Have I missed any options?
If any of the above “understandings” are incorrect, please advise.
Thanks for your help
Permalink Submitted by Alan Spross on Tue, 2008-07-01 20:26
Sorry to hear of your loss.
First, a general comment. These IRAs are not part of the probate estate since the death benefits pass by beneficiary designation. Therefore, each of the 4 of you have the right to deal directly with the IRA custodians, and your executrix role here is only that of unofficial coordinator and communicator if the other 3 are receptive. For example, you would be the one to supply them with copies of the death Cert and/or coordinate a signed letter from all of you to establish 4 separate BDA accounts. This must be done by 12/31/09 in order for each of you to use your own life expectancy, and your first RMDs must also be taken by that date except for those that can opt for the 5 year rule.
Your referral to the 5 year rule suggests that your mother passed prior to her required beginning date, which is April 1st of the year following the year she turns 70.5. If this is not the case, the 5 year rule does not apply.
Your understanding that the traditional IRA is fully taxable (unless your mother made non deductible contributions) and the Roth distributions are tax free is correct.
1) Yes. This process is called re-titling the IRA, not converting it. This is already a Roth IRA and will continue to be. Two things that you or the others cannot do are to make the inherited Roth your own or to roll it over. You can change custodians, but only by direct transfer. If anyone receives a check made out to them, it cannot be rolled over or returned to the IRA. Future tax free growth would be lost.
2) Since the Roth has reached the 5 year holding period from the year of your mother’s first contribution, the inherited Roth accounts are fully qualified. That means that all distributions are tax free, and the 1099R that reports the distributions should be coded with a “Q” in Box 7. Q means qualified. While you each are subject to RMDs or the 5 year rule, taking distributions before you need to forfeits tax free growth on the earnings that continue to accrue.
3) Yes. The transfer to Fidelity must be made directly into an account titled substantially the same as the first BDA at Pioneer. Do all 4 of you want Fidelity to be your custodian? If so, it will be easier to create the separate accounts after the transfer to Fidelity.
Note that separate accounts, if set up by the deadline will enable each of you to:
1) Select your own investments.
2) Take RMDs over your individual life expectancy, or faster if desired. Otherwise, the age of the oldest beneficiary applies to all.
Successor beneficiaries should be named ASAP. That is also more clearly done with separate accounts rather than one account. Some IRA custodians may actually require the set up of separate accounts to facilitate accounting and prevent disputes.
Any other questions, please post.
Permalink Submitted by George McLean on Wed, 2008-07-02 14:31
Thank you for your condolences and for your VERY informative response. I feel like I must be absolutely on top of “what can be done and how to do it” with these IRAs because I don’t have real solid trust in the person I’m going to deal with when it comes to the paperwork. It’s an issue where the investment was sold to my parents starting over 30 years ago ….a classic “come to dinner and hear our spiel”…. and they viewed this person as a financial counselor while I view them as a salesman who pitched only THEIR products and got a cut in return. My parents paid significant front-end loads and the mutual funds they were in were DOGS in my opinion. Prior to his death 10 years ago my Dad looked over the amounts he would leave my Mom and was pleased with how the funds had grown…. and they WERE very adequate for her but I can only imagine what they COULD have become had they been in even an average performing no-load fund.
That being said, I want to clarify a couple of things and pose a couple more Q’s. Mom started taking required distributions from the traditional IRA at 70 1/2 in 1990 and around that same time she established a Roth and funded it over the next 4 years with an amount that I had calculated as the maximum amount possible before it would put her into the next tax bracket. She never took a distribution from the Roth.
I know we must establish the BDA accounts and begin distributions from the traditional by Dec 31 2009.
1. If distributions have never been started from the Roth am I required to start now? (You said in 2. above that “taking distributions before you need to” which made me think we had options)
2. I’m thinking that retitling the Roth will end up being “The Estate of Lydia C for the benefit of Rebecca C”, but that the traditional IRA funds will be in my name without mention of estate/beneficiary etc. Correct?
3. Will both the traditional and Roth be considered to be an IRA-BDA?
4. How will MY beneficiaries be required/allowed to handle these funds when they inherit them (spouse and non-spouse)?
5. Nebraska has a 1% inheritance tax…as you said, since they were left to beneficiaries and not to the estate they are not part of probate, but are they subject to inheritance tax?
6. Finally, what is an inherited tax basis?
I can’t tell you how fortunate I feel to have come across this forum. After these questions are answered I think I’ll be pretty much set, but if I need some fine-tuning should I continue to post in this manner?
I very much appreciate your help. Thank you.
Rebecca
Permalink Submitted by Alan Spross on Wed, 2008-07-02 20:53
Sure. You can post just like you have been.
Since your mother passed after starting RMDs at 70.5, the 5 year rule does not apply to the beneficiaries of her traditional IRA. But since a Roth has no RMDs for the owner, her death is considered to be prior to the required beginning date for the Roth IRA only. Also, note that the first year a Roth was available was 1998, so she could not have started it in 1990. However, she still could easily have met the 5 year holding period.
Note retitling the IRAs and starting RMDs applies equally to the traditional and Roth IRAs. Roth IRA RMDs are required of non spouse beneficiaries.
1) The first beneficiary distributions from the Roth must be prior to 12/31/09. If you limit those distributions to the RMD only based on your individual life expectancies, most of the Roth balance will be preserved for many years, over which it can earn tax free growth. I would only take out more than the RMD if you really need it, in order to preserve tax free growth. But you certainly can take out more if you need to, but you cannot take out less than the RMD. The 5 year rule can be elected for the Roth only, NOT the traditional IRA.
2) In your first post you indicated that the 4 of you were named directly on the IRA accounts as beneficiaries, NOT the estate. If this is incorrect, much of what I posted needs to be changed. If your first post was correct, the retitling format would be “Rebecca C as beneficiary of Lydia C, deceased May xx, 2008”. The estate is not mentioned unless the IRA was named as the IRA beneficiary on the IRA or unless there was no beneficiary named and the estate became the default beneficiary. This retitling process is the same for both traditional and Roth accounts. Perhaps your mother named beneficiaries differently on the two accounts?
On a beneficiary IRA, both the decedent’s and the beneficiary names must be shown. The order is not that important as long as both show.
3) Yes. This is true whether the IRA was left directly or left to the estate.
4) Your successor beneficiaries must continue the RMD method that you established. They cannot switch to their life expectancies because they would be successor beneficiares and not designated beneficiaries. However, they can still name THEIR successor beneficiary. A spouse cannot make a non spouse inherited IRA their own and must continue the RMD method used by the original beneficiary.
5 and 6) Sorry, but am not conversant with NB inheritance tax issues, but since NB has both an estate and an inheritance tax, you should probably get local tax assistance there.
Permalink Submitted by George McLean on Thu, 2008-07-03 12:57
Just to clarify…both the traditional and the Roth IRAs were left equally to 4 children, NOT to the estate.
And 1990 was a typo….the Roth was opened in 1999.
Appreciate your help. Thank you.
Permalink Submitted by Alan Spross on Thu, 2008-07-03 17:25
Good.
I think everything has been covered and the beneficiaries are much better off having been named directly on the IRA agreement.