Inherited IRA
I have a client who has a Traditonal IRA with one custodian and an inherited IRA with another custodian.
This client would like to fully fund a Traditional IRA for the next several years and consolidating these IRA’s together would simplify her life.
Is there a reason why my client couldn’t have one Traditional IRA and transfer the inherited IRA into their own Traditional IRA? Why wouldn’t this make sense for my client?
Permalink Submitted by mk foss on Thu, 2012-03-22 16:58
An inherited IRA cannot be combined with an IRA owned by the beneficiary. The inherited IRA requires annual RMDs based on the IRA balance – that wouldn’t work if funds were commingled.
To simplify things, she could have the inherited IRA RMDs automatically withdrawn and sent to her so she’d only have to worry about the traditional IRA.
Permalink Submitted by Derrick De Haan on Thu, 2012-03-22 20:46
Is my client, age 55, able to make withdrawals from her inherited IRA free of the 10% early withdrawal penalty since it is an inherited IRA? Any withdrawals would then just be subject to normal Federal & State Income Tax correct?
Permalink Submitted by mk foss on Thu, 2012-03-22 21:33
Correct. RMDs (10% penalty free) are required from the inherited IRA. They start the year after the death of the original owner. They’re taxable as ordinary income unless the original IRA owner had basis from nondeductible contributions. Failure to take the RMDs as required can lead to a penalty of 50% of the shortfall.
Permalink Submitted by Robert Lozzi on Thu, 2012-03-22 22:02
yes,in this example (inherited spouse is 55) there is no 10% penalty– however if the deceased spouse was under 701/2 at time of death the spouse with the inherited IRA would not have to take RMD’s until the deceased spouse would have turned 70 1/2
Permalink Submitted by Alan Spross on Thu, 2012-03-22 22:56
This client cannot combine the inherited IRA with an owned IRA, but they could still consolidate IRA custodians. The inherited IRA can only be moved by direct trustee transfer to a new IRA custodian.
Of course, if the inherited IRA is from a spouse, then the IRA could be rolled into an owned IRA, either new or existing. But if distributions are desired prior to 59.5, the 10% penalty would apply.