Inherited IRA
I heard that there are some IRA custodians that will force distribution to a beneficiary on the account of a deceased owner. Therefore become taxable immediately. Their IRA adoption agreement actually states it. It was mentioned that many people don’t realize this until a death occurs? Is this because it is classified as an inherited IRA or do beneficiary account automatically become labeled as inherited IRA?
Thanks for your response.
Andy
Permalink Submitted by Joseph Arsenault on Wed, 2009-02-11 17:27
Beneficiary accounts must be titled as inherited IRAs in the name of the deceased owner FBO “beneficiary” to be able to rollover the inherited funds into an IRA. Without the account being properly titled it wont be an eligible rollover and the distribution will be fully taxable.
As far as the IRA custodian forcing a complete distribution to the beneficiary instead of transferring the funds into the inherited IRA, I am not sure if the 60 day rule applies to the beneficiary or if it must be a trustee to trustee transfer.
I guess the question would be, does the beneficiary have 60 days to set up an inherited IRA and rollover the inherited assets to avoid a taxation just like any IRA owner?
Permalink Submitted by Joseph Arsenault on Wed, 2009-02-11 17:44
Ok
The funds do need to be directly rolled over (trustee to trustee transfer) to the inherited IRA to avoid a taxable distribution. This is something that became available under S824 of PPA ’06.
If a nonspouse takes a distribution (or is forced to), it is a taxable event.
Make sure the custodian does not force distributions to nonspouse beneficiaries if you want to take advantage of an IRA stretch.
Permalink Submitted by mk foss on Wed, 2009-02-11 17:50
Prior to the final 401(a)(9) regulations there was a problem when the IRA owner passed away after the Required Beginning Date with no beneficary listed or listing his/her estate. In those cases the distribution was paid in full by the end of the year following the death.
The current regulations allow life expectancy in all cases so that if there is no “designated beneficiary” – that is a beneficiary with a life expectancy, the life expectancy is measured by the age of the deceased owner.
A custodian’s agreement provides for a full payout upon the death of the owner could result from two things. The first, is that the agreement was changed after the 2002 regulations and you haven’t obtained the latest version. The second is that they just don’t want to deal with the beneficiaries of the IRA owners.
If there is no more current position of the custodian, the owner should transfer the funds to a more accomadating custodian. There is no 60 day rollover period for a nonspouse beneficary, but a beneficiary can have the benefits “transferred” to another account.
Permalink Submitted by Alan Spross on Wed, 2009-02-11 20:04
Sec 824 of the PPA does not apply here since it does not address IRA to IRA transfers, just those from QRPs to a Roth IRA. However, since 824 does allow non spouse transfers to an inherited Roth, this might eventually pave the way for non spouse IRA beneficiaries to convert.
With respect to IRA custodians who both require a lump sum distribution and also refuse direct transfers, I believe that they are legally allowed to do both, so IRA owners with non spouse beneficiaries need to check into this and transfer the account out if they perceive a problem.