Wife’s IRA- should have been inherited?

Submitted by Ed Burgio on Mon, 2013-11-11 20:29

Hello,

My wife and I began combining our assets after getting married earlier this year. She is 23 and one of her accounts is a Traditional IRA with about $75k in it. She believes she inherited it from her father when he passed away 10 years ago. I called the company that it’s held at, and they confirmed that it is a Traditional IRA, and not an Inherited one.

Is this possible? She doesn’t recall making any contributions to it, so my guess is that it was supposed to be an Inherited IRA. However, I don’t know how this could have happened. We’re there different laws in place in 2003 regarding Inherited IRAs?

If this was set up incorrectly, what is the proper course of action? Can the IRS find out about it, and what kind of penalty would she face? She was only 13 when her Financial Advisor set this up, so it’s really not her fault.

I’m getting a little stressed out about this, so any help is truly appreciated.

Thanks a lot,

Ed



Submitted by tomd37 on Mon, 2013-11-11 22:21

A person has to have earned income in order to make a contribution to an IRA.  Did your wife have earned income during her teen years?  Is it possible her father opened a traditional IRA in her name using such earned income as the qualifying income, but paid it out of his pocket?  Does she have any tax records from those teen years indicating earned income?    Tom D. 

Submitted by Alan - IRA critic on Mon, 2013-11-11 22:33

  • Additional contributions cannot be made to an inherited IRA, and it’s possible that this was inherited and never properly titled. An inherited IRA title shows both the names of the beneficiary and the person the IRA was inherited from. She needs to do some additional research to determine the history here, and perhaps can get some help from the executor of her father’s estate as well as requesting the background on the current custodian’s records. Note that an inherited IRA can only be moved to another custodian by direct transfer, so she should not request a check made out to her as it could not be rolled over if it was confirmed that this was an inherited IRA. She had a financial advisor when she was 13?? Is this person still around to answer some questions.
  • If it turns out this is inherited, it needs to be titled properly. There have been no changes with respect to this situation since 2003. She also would have to make up the past annual RMDs and request a penalty waiver on Form 5329. Due to her age, this waiver would almost certainly be granted. Another reason to know the real status of this IRA is because there are no penalties for early distributions on an inherited IRA as there is with her own IRA.
  • The fact that this IRA has 75k in it really suggests that it IS inherited. While regular IRA contributions can be made for a child with the child’s earned income from part time or summer jobs, it is not likely such an IRA would be worth 75k after 10 years. It is also unlikely that at her age she had a job and rolled over a 401k or other plan benefit and presumably she would have remembered something like that. So all signs point to an improperly titled inherited IRA from which her annual RMDs have not been taken. These RMDs would have started in the year following her father’s death for every year except 2009 when RMDs were waived.
  • If some further research can be done which will probably result in the IRA being re titled, I suggest nothing further be done in the meantime to prevent creating an additional problem.
  • You could post back here when you find out more for the best course of action from there.

Submitted by Ed Burgio on Thu, 2013-11-14 18:38

Hello,Thanks so much for the help with this.  We’ve looked into it and there was no additional contributions since it was inherited from her father, so I’m positive it should have been titled as an Inherited IRA.Therefore, we are working on getting it titled correctly right now.  Once that is completed, should we calculate and withdraw the RMD that is due over the past 10 years? Or should we request the penalty waiver first? Thanks again for helping us through this!Ed 

Submitted by Alan - IRA critic on Thu, 2013-11-14 20:21

Calculate and distribute the RMDs starting with the year after her father passed, but omitting 2009. Once you get the divisor for the first RMD year, reduce it by 1.0 for each successive year except the reduction for the 2010 RMD should be 2.0 less than that used for the 2008 RMD. Request the penalty waivers right after taking the RMDs and include a copy of the statement showing the total make up RMDs. You can’t do any of this until the account is re titled correctly and that might take some extra documentation depending on prior records. She will need a certified copy of the death certificate.

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