Minor – Inherited IRA

Submitted by David Anderson on Wed, 2013-11-06 20:31

My wifes Aunt recently passed away unexpectedly. She had been putting money in an IRA for her nephews and neices. My son Reagan is a benificiary and a Minor Inherited IRA was set up for him with Wells Fargo.

Its not a huge account but I am unsure of the rules on the account. I am the guardian on the account but I am not sure if we can add to the account, what the fees are, …etc. I have not gotten the disclosure documents yet only account and signature documents. Is this treated just like a traditional IRA? Can we set up another account and roll this over to that account? I dont want it to just be funds that are eaten up by fees as that is not what Aunt Jan would have wanted for any of the nephews and neices.

Thanks!



Submitted by David Anderson on Wed, 2013-11-06 21:18

My son is one of my wife’s Aunts nephews that had this account set up.  It is under $5000 and my son is 9.

Submitted by Alan - IRA critic on Wed, 2013-11-06 21:19

No additions can be made to the account as it is a non spouse inherited traditional IRA. Any fees should be available from Wells Fargo. If you wanted to change custodians it can only be done by direct trustee transfer. A check made out to the new custodian FBO Reagan inherited IRA would qualify, but any check made out to him or you as guardian directly cannot be rolled over and will be fully taxable. If the account is so small that it will be hard hit by fees, you could always distribute it and report the income on the minor’s return if he had to file because of his total income. Each year there will be a very small RMD based on Reagan’s life expectancy for his attained age at the end of the year following the year of the owner’s death. 

Submitted by David Anderson on Wed, 2013-11-06 21:46

Aunt was 56 when she passed and my son is 9.  So starting next year at age 10 there will be a RMD required.  Since he is 10 and would not normally be filing a return would he have to file a return because of this RMD or would Wells Fargo reduce the distribution by the taxable amount?

Submitted by Alan - IRA critic on Wed, 2013-11-06 22:34

Since the aunt passed prior to her RMD date, you also have the option of the “5 year rule”. Under that option instead of taking life expectancy RMDs each year, there would be no RMD required the next few years but the account must be drained by the end of the 5 th year following the year of death, apparently by 12/31/2018. If the account balance is small enough, however it might be possible to take out 20% a year and still not have to file a return for him, essentially getting the account drained tax free. You might take the distributions and invest them in a 529 plan for him for example. In other words, the RMDs could be small enough that he would not have to file a return at all and you could factor that in with the balance of the account and whether you want to drain it and apply the funds elsewhere or whether it is large enough to be worth stretching out using life expectancy RMD amounts only. At his age those RMDs would be very small, probably not large enough to require tax filing. Therefore, you would probably not want Wells to withhold any taxes that would be lost or require filing for a refund.

Submitted by Thomas Manthey on Sun, 2013-11-10 08:56

My sister, age 59 1/3, died 9/29/13.  Her will left her estate to our mother.  However no one thought to update the beneficiary status of her Roth IRA where 98% of her wealth exists and my nephew, age 14, has now inherited a Roth IRA worth about $140,000. The IRA is invested via Ameritrade.  His parents agree Mom should get the money for her living expenses and they agree with my Mom’s desire to give $5000 to each of my sister’s nephews and nieces…6 all told…for their college education fund. There is a $50,000 lien on my sister’s estate for medical expenses incurred.. She and my nephew reside in Oregon.                                                                                                                                                                                                                                                                     The one lawyer my sister spoke to suggested moving the money into a trust from which she, as my nephew’s guardian, could disperse money to our Mom…I am not clear that is the best way or the legalities involved in establishing her as the official custodian of such a trust on my nephew’s behalf for the sake of his Grandmother…my nephew has been told of the situation and understands and supports giving his Grandma the money she needs. Your help in facilitating the release of money on our Mom’s behalf is much appreciated.

Submitted by Alan - IRA critic on Sun, 2013-11-10 18:08

  • OR provides 100% creditor protection for IRAs, therefore even though the estate has virtually no assets it appears that the medical liens will not apply to the Roth IRA, however an OR estate attorney should verify that before anything else is done with the inherited Roth. If the Roth is in the clear, then the guardians of each of the 6 to receive 5,000 should determine when and in what form they wish to receive the 5,000. Perhaps they want to open a 529 plan for the college funds. The beneficiary can take a tax free distribution and simply gift the cash from the Roth distribution to the responsible parties. What remains will go your mother, although if there is any chance she ends up on Medicaid, then a Medicaid trust should be considered. Consult with another OR estate attorney to get more input regarding the best way to transfer the funds. One possibility would be to have your nephew gift up to the annual exclusion amount to your mother for as long as it is necessary or makes sense. That would avoid the costs and tax filing requirements of a trust.
  • The year your sister first contributed to the Roth must be determined to see if the Roth is qualified. By 1/1/2014, if the year of the first contribution was prior to 2010, the Roth is qualified and completely tax free. Due to your sister’s death, age 59.5 is not a factor, but the required 5 year holding period still is. If the Roth is not yet qualified, it would be best to wait out the 5 years before distributing any earnings since those earnings will be taxable until the 5 year period is completed. It is highly unlikely that the 30,000 of gifts would be enough to reach the earnings amount since earnings come out last if the Roth is not yet qualified. 

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