Inherited 403(b) RMD before/after convert to IRA?
Can the beneficiary of a 403(b) annuity convert the plan to an Inherited Traditional IRA in the year of death of the original annuity holder, and then take the RMD from the converted Trad. IRA, or does the RMD have to come directly from the 403(b) annuity first? The deceased had not yet taken the 2012 RMD, so the beneficiary has to take it before Dec. 31st. But, the annuity custodian company is going to transfer all assets to another institution, into an existing Inherited Trad. IRA, and we need to figure out if the RMD needs to come out first, while the annuity is still intact. IRS does not allow co-mingling of IRA and 403(b) RMD amounts, so that’s why this question has come up.
Permalink Submitted by Alan Spross on Thu, 2012-10-11 21:06
RMD for a 403b plan must be distributed from the 403b or another 403b before transfer to an IRA. The current custodian might request evidence that the RMD for their particular 403b had been satisfied by another 403b distribution.
A 403b RMD can be aggregated with another 403b just as an IRA RMD can be aggregated with other IRA accounts. But they cannot be aggregated with each other.
If a rollover to an IRA is made without the RMD distribution due to error or misunderstanding, the RMD is still considered completed, but the rollover to the IRA then becomes an excess IRA contribution with respect to the IRA.
Permalink Submitted by ray perez on Fri, 2012-10-12 02:07
will the 403(b) custodian send a check made out to the beneficiary for the RMD even though the annuity is still in the name of the deceased? The can’t send a check to the deceased, the bank will no longer take deposits made out to the name of the deceased. So, the check needs to be made out to the beneficiary, but it would be coming from an account still registered to the deceased. And, the custodian is not willing to set up an account in the name of the beneficiary (as an Inherited Annuity 403(b) because the value is under the dollar level at which the custodial institution is willing to set up an Inherited account. So, will they cut a check for the RMD in one name (beneficiary) when the account is still the deceased’s account?
Permalink Submitted by Alan Spross on Fri, 2012-10-12 02:59
The RMD must be paid to the beneficiary only. I don’t know exactly what they record internally, but they have to set up the account to reflect the beneficiary interest that exists for the purpose of issuing the RMD check to the beneficiary and also to process the direct rollover of the balance.
It may come down to simply setting up the beneficiary account but requiring a total rollover or distribution of the balance.
Permalink Submitted by ray perez on Fri, 2012-10-12 03:24
Can they make the RMD check to the deceased, as long as it can be deposited to the “Estate of” bank account, even thought the distribution would be after the date of death? The 1099 wouldn’t indicated the date of the distribution, so would the IRS know or care that the distribution was after the date of death?
The institution (custodian) will not set up an Inherited 403(b). The will roll it over to another institution where the beneficiary already has an existing Inherited Trad. IRA. Or they will cut a check to the beneficiary for the entire value of the account (total distribution), but then the money will no longer grow tax-deferred for the beneficiary.
Permalink Submitted by Alan Spross on Fri, 2012-10-12 04:46
No, they must make post death distributions to the beneficiary unless the beneficiary executes a qualified disclaimer. And if the same beneficiary would receive funds through the estate, the disclaimer would not be qualified. Anything else is a contractual violation.
The plan can probably take care of the direct rollover and RMD as an internal accounting matter, so actually setting up an account is not actually required. By law they must offer a direct rollover for the balance in excess of the RMD and that will allow additional tax deferral. If the 5 year rule applies (decedent passed prior to RBD), then there is no RMD required before doing the direct rollover. The plan provisions and/or beneficiary election determine application of the 5 year rule.
I assume this is a non spouse beneficiary. If so, the beneficiary also has the option to have the direct rollover made to an inherited Roth IRA. This rollover would be fully taxable, and the inherited Roth would still have RMDs, but future growth would be tax free.