Deceased IRA

Submitted by [email protected] on Wed, 2009-12-30 16:19

I’ve read in one of the Newsletters that a deceased husband’s IRA that was rolled over to the spouse (me) can be cashed out without penalty. Am I dreaming? What month’s newsletter was this in?



Submitted by Jose Morales on Wed, 2009-12-30 16:58

If you roll over your deceased spouse’s IRA to an IRA in your own name, then is it treated as if it was your IRA from day 1 and all standard IRA regs apply. If you are 59 1/2 or older any distribution you take would be considered a normal distribution and only subject to normal income tax. If you are under the age of 59 1/2 any distribution you take will be subject to income tax, plus a 10% tax penalty.

If you are under the age of 59 1/2 and you had kept the money in an inherited IRA with you as the beneficiary, you could have taken distributions and no been subject to the 10% tax penalty, as death is an exception to the tax penalty for premature distribution.

Submitted by [email protected] on Thu, 2009-12-31 14:30

The account is titled as follows: Fidelity Inherited IRA – My Name …. IRA DBA (Original Depositor – deceased husbands name -) FMTC Custodian. Can this be cashed out without penalty?

Submitted by Jose Morales on Thu, 2009-12-31 15:36

That appears to be an inherited IRA that has not been transferred into your own name, from which distributions to the beneficiary would not be subject to a 10% federal income tax penalty.

Submitted by Al Fry on Thu, 2009-12-31 16:11

Sounds correct. I would still ask someone in the custodian’s tax department how the 1099-R will be coded. It sould be a “4” (Death) in Box 7; have them confirm via email. It is amazing how many time these can be issued wrongly.

Submitted by Alan Spross on Thu, 2009-12-31 21:08

Note that in your opening post you indicated that the account had been rolled over to you. Technically, that means the account was placed in your name only with no reference to your husband in the registration. But your later post does indeed indicate that the account is registered in beneficiary form, which Fidelity refers to a “BDA” account. Check again and you will probably see that the “DBA” you indicated is really “BDA” and this confirms that the account has not been rolled over to you, merely re registered in beneficiary form for your benefit as the beneficiary.

You can still roll this over to your own account at anytime, but you should not do that prior to reaching age 59.5, since your distributions would then be subject to an early withdrawal penalty. As it is, you can distribute what monies you need subject to tax, but no penalty. As Al indicated, be sure the 1099R shows a code 4 in box 7 if you took a distribution in 2009, or for any distributions you take until you assume ownership.

Note that you may have an RMD obligation in 2010 and beyond under this beneficiary format if your husband would have reached 70.5 in 2009. There are no RMDs for you as the sole spouse beneficiary until that particular year. This should also be considered as a factor in doing the rollover.

Be sure you understand the tax impact if you cash out this account. If your husband ever made non deductible contributions to his IRA, you would inherit the remaining amount of them and some of your distribution would then be tax free. Check for Form 8606 on his prior tax returns to see if such contributions were made.

Submitted by [email protected] on Sat, 2010-01-02 22:07

You are correct, it does say BDA.

Now I just ran across a letter from Fidelity stating that the Worker, Retiree and Employer Recovery Act of 2008, suspended MRD’s for 2009. It also states, “MRD’s are normally required by law annually for people who own a beneficiary designation account, including an inherited IRA. . . .you are not required to do so for 2009. Please keep in mind that the suspension is for 2009 only and that you must take MRDs from your retirement accounts in 2010 and each year thereafter.”

Is this for people that are 59 1/2 that are eligible for the MRD distribution? I’m only 53, and my husband died at the age of 49, in 2001. I understand the tax impact that it will have if I take the distribution.

I also have an Annuity with another company. Can it be rolled over into a CD? If not, is there a way to take a distribution from this account? What other options would I have, with rolling over an annuity? Thanks so much for your help.

Submitted by Al Fry on Sat, 2010-01-02 22:31

Is the annuty in an IRA, or is it stand-alone or in a non-qualified brkerage account? You should be sure you are not losing some valuable Living or Death benefit amounts that may far exceed the cash surrender value by cashing it in. Many people pay extra fees to get these benefits in an annuity, then cash them in without taking advantage of these benefits. Most all annuities have surrender charge free withdrawal (called free-out) benefits. Check with your financial advisor (they usually will not be in a bank; but they COULD be) for details.

Submitted by Alan Spross on Sat, 2010-01-02 23:29

Alfry is better able to help you with any non qualified annuity questions, so I will leave those topics to him.

With respect to the inherited IRA, it is good that it is a beneficiary (BDA) account, because under that account you are not REQUIRED to take any RMDs for any year until the year your husband WOULD HAVE reached 70.5. That would be another 12 years or so from now. However, if YOU need money from the account you can take out whatever amount you need without penalty. You would just owe ordinary income taxes on it. When you reach 59.5, you can then assume ownership of the account since at that age you can take distributions without penalty from an owned account. Because you have no RMD requirement for another 12 years, the letter from Fidelity that states that RMDs are waived for 2009 is immaterial to you, since they are not required.

If by chance you were NOT the sole beneficiary on his IRA, please advise because that could change things.

Also, please confirm the status of the annuity so AlFry can help you with that question. Am assuming the annuity is NOT in the IRA with Fidelity.

Submitted by [email protected] on Sun, 2010-01-03 00:20

Do you guys ever sleep?
Thanks for all your helpful information. Unfortunately I need money now, and will have to pay the taxes on it. Can you tell me approximately what my tax on it will be? If I take $10,000 out of it (and I make about $36,000 at my job) how much would I owe? I usually get about $4,000 back from the IRS.

The annuity is an IRA through Transamerica Life and Annuity which I got through Chase Bank. It appears to have a surrender charge up to 6 years, but I will have surpassed that this year 2010. (purchased on 3/19/03). I will be meeting was an advisor (via Chase Bank this month). I’d like to have to knowledge about it before meeting with him.

Do you guys have any tricks for Social Security? My son receives Survivor Benefits until he’s 18, or 19 as long as he’s in school. But I thought thoses benefits would still be coming in, if he’s going to college. Dealing with SS office is taxing to my brain and patience.

Thanks you all for helping me with these questions. I received Ed’s Retirement Planning package last year from my mother-in-law for Christmas, and have updated all my stuff for when I die – even had to do Mother-in Law’s things. So this has been very useful information. Thanks.

Submitted by Alan Spross on Sun, 2010-01-03 20:46

With respect to the SS Survivors Benefits for your son, they run through age 18. Between 18 and 19 they can continue only if he is a full time high school student (no schooling beyond Grade 12). There is no continuation for college attendance.

Your tax bill is subject to a large amount of variables, but you appear to be in the 15% federal bracket, meaning that the federal taxes on your distribution will be around 1,500. When you do your 2009 taxes, plug in another 10,000 income to see what the results are, but this procedure assumes that the same conditions will apply for 2010 as for 2009, eg qualifying for Head of Household, your son’s age with respect to any child tax credit, whether he still qualifies as your dependent and any higher education tax credits. If you get 4,000 back now, you are probably having too much withheld in the past.

You should also determine if your husband ever made non deductible contributions to his IRA. These would have been reported on Form 8606, and any of these contributions would reduce the taxable amount on a pro rated basis, ie if his % of non deductible contributions to the year end value was 10%, then 10% of your 10,000 distribution would be tax free. The largest set of variables are probably your son’s age, and whether he will be in college or not.

If the annuity is an IRA annuity, is this also an inherited IRA from your husband or it is your own IRA? Are you thinking about taking withdrawals from that also?

Submitted by [email protected] on Sun, 2010-01-17 16:45

Alan and Alfry,
The annuity is an IRA annuity and the surrender date is coming up in March (no surrender fees). What do you think about me rolling it over into a CD – they offer 9, 13 etc. month CD’s. What are other investments that can me done with this annuity? Keep in mind that I will need to access the money from time to time.

Also in regard to the Fidelity Investment account, the monies are invested in mutual funds, to the value goes up and down. Shouldn’t I get that rolled over to an Inherited CD now? Fidelity tells me they have Inherited CD available, so what should I choose? By the way, the Inherited Fidelity account is listed as a 4 on the 1099.
Thanks, Jennifer

Submitted by Alan Spross on Sun, 2010-01-17 17:23

Jennifer,

After reviewing the previous posts, it is now clear that your distributions from the inherited (BDA) IRA will be taxable, but free of penalty. The coding of “4” is the final bit of info that confirms this. Also, you do not have to take an RMD from that account until well after you would be 59.5, so you should plan to roll this IRA over to your own name after age 59.5, but NOT before that date or your distributions will be penalized until you are 59.5. Since this IRA is in inherited form, do NOT take a distribution you intend to roll over becuase you cannot keep this in a beneficiary account if you take a distribution. It can be moved to another custodian by direct transfer ONLY.

You have access to Fidelity’s full range of investments for this IRA including their brokered CDs, which are FDIC insured but paying a very low rate of interest right now. If you tie the funds up in one of those CDs, and then need funds from this IRA, the CD will have to be sold by Fidelity like a bond. These are NOT redeemed directly from Fidelity like you would cash in a CD at a bank. The value of this CD will also fluctuate, and will drop if interest rates rise. If you want to go this route, you should keep the maturities to 4 months or less because interest rates will likely rise before the end of 2010. Fidelity can help you with advice on what to invest in, and I would be inclined to leave this account with them instead of transferring it to a bank.

With respect to the annuity IRA, it appears that this is your OWN IRA and was not inherited. You will have to check with the agent or insurance company to see what range of investments they offer. If this account is owned by you or even if it was inherited and rolled over to your own annuity IRA, any distributions you take prior to age 59.5 will get the 10% penalty. Therefore, you should take distributions you need from the inherited IRA and not the annuity, at least until 59.5. This means that your investment choices can be longer term in the annuity, and should be kept short term in the inherited IRA so that you can get distributions without either a 10% penalty OR a penalty from selling an investment before it matures.

Submitted by [email protected] on Sun, 2010-01-17 21:59

Alan,
I’m confused with your statement, “Since this IRA is in inherited form, do NOT take a distribution you intend to roll over becuase you cannot keep this in a beneficiary account if you take a distribution. It can be moved to another custodian by direct transfer ONLY.”

So are you saying, if I take a distribution (let’s say $5,000) from the Inherited IRA I cannot keep the IRA as Inherited? Or are you saying, if I rollover the Inherited IRA into another investment (CD) it can no longer be considered Inherited? So I need to know, can I take a distribution of $5,000 and leave the remaining balance in the account, and it would remain as an Inherited IRA, is this correct? I also presume, there will be some kind of commission that I would have to pay to Fidelity for taking a distribution.

Gotcha on the annuity. It’s not inherited, so will keep the investment longer termed.

Submitted by Alan Spross on Mon, 2010-01-18 00:19

If you take a distribution from the inherited IRA, the remaining balance in the account is not affected. You can do 3 things with the distribution you have taken:
1) Roll it over to your own IRA (but then you are subject to penalty prior to age 59.5)
2) Use it as you wish, which will probably be the reason for most of your distributions
3) Roll it over to an inherited IRA – this one may be difficult to do because most IRA custodians to not realize that a spousal inherited IRA is NOT to be treated as an inherited IRA for rollover purposes, and they may not accept the rollover.

Therefore, if all you want to do is change custodians, do it by direct transfer rather than taking out the money and trying to get another custodian to open an inherited IRA for you.

With respect to the cost, there should not be any unless you are liquidating certain investments within a short period of purchasing them. That is a charge from the investment, not an administrative charge by Fidelity. There might be an exit fee charge if you want FIdelity to transfer the account to another custodian, or there could be a small account fee based on the balance. But just to issue a distribution check, probably not.

Submitted by [email protected] on Mon, 2010-01-18 14:13

Thanks for your help Alan! This website has been extremely helpful.
Jennifer

Submitted by [email protected] on Mon, 2010-01-18 14:29

Yikes Alan,
Here is the response back from Fidelity about getting a withdrawl. What does this mean exactly

FROM FIDELITY:
Please keep in mind that before you can make a distribution from your IRA-BDA account, you will need to sell securities to the cash core account. Withdrawals are only made from the cash core account. Because Fidelity does not make the decision on when to sell securities to generate the proceeds you want to withdraw, you will want to make the trades yourself.

You may sell the securities by following the steps below online:

1. Click the “Accounts & Trade” tab
2. Select “Portfolio”
3. Click the Select Action drop down box and select “Trade Mutual Funds”
4. Click on “Sell a mutual fund”
5. Select the symbol to sell
6. Enter the amount of shares, dollar amount or Sell all shares (you do not need to enter shares or dollars if you select all shares)
7. Click on “Preview Order” to view your order details
8. Click on “Place Order” or “Edit Order” as needed. Choose “Cancel” to cancel the trade and return to the Trade Mutual Funds page

Be sure to print the confirmation for your records.

Please note, Fidelity mutual funds take trade date plus one business day to settle. Upon settlement, sale proceeds are available for withdrawal. To request a withdrawal upon settlement, please follow the steps below:

1. Click on the “Accounts & Trade” tab
2. Select “Portfolio”
3. Click on the Select Action drop-down menu next to your account
4. Scroll down and click on “Withdraw from IRA”
5. Verify the account to transfer From and To, then click on “Next”
6. Enter the Withdrawal Type, Amount, and Tax Withholding options
7. Review the information, then click “Next”
8. Review the state tax information and update, if applicable, then click “Next”
9. Verify your request then select “Submit”

Submitted by Al Fry on Mon, 2010-01-18 16:30

This is basically a “Self Directed” IRA. That means you can buy and sell (trade) mutual fund shares, stocks, bonds and annuities within the IRA. Apparently the one you have restricts you to mutual funds. If you make a withdrawal, you must decide which shares to sell to create the cash. Some, I believe have a “pro rata” option (at least annuities do) to sell a portion of each to create the cash.

Submitted by Alan Spross on Mon, 2010-01-18 17:44

I read this to mean that Fidelity wants to avoid the added expense of making “in kind” distributions from BDA accounts, so they require the beneficiary to generate enough cash in the account by selling or redeeming shares before Fidelity will make the distribution.

This is a custodian driven requirement because the IRS is perfectly OK with in kind distributions. I do not know if Fidelity’s requirement is typical, but have not heard this one before. For the average beneficiary though, generating the cash is probably easier and the commissions, if any, are paid from pre tax money in the BDA.

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