IRA year of death distribution and inherited IRA
A custodian has informed the beneficiaries of an IRA account that the participants remaining year of death distributions can only be made after the beneficiary has established and funded an Inherited IRA account and then, before 12/31 of the year of death, withdraw the amount that would have been the participant’s year of death RMD. An advisor for the beneficiary cautioned that this may trigger an “excess contribution” subject to the 6% excess contribution penalty and may disqualify the inherited IRA. It is his opinion that the year of death distribution should be made before the Inherited IRA accounts are funded and that there is no requirement that the Inherited IRA accounts be established until 12/31 of the year following the death of the participant. Is there a 6% excess contribution penalty concern?
Permalink Submitted by Alan - IRA critic on Fri, 2014-10-31 19:40
Excess contributions are not an issue here. The beneficiaries cannot take any distribution including the decedent’s year of death RMD until the account is properly re titled as an inherited IRA. To re title the account the beneficiaries must submit a death certificate and complete any other paperwork required by the IRA custodian. This needs to be done before the custodian will make any distributions, add new successor beneficiaries or allow investment changes in the IRA. Once the IRA is retitled, the year of death RMD can be distributed to the beneficiaries. The retitled IRA can also be transferred in a direct trustee transfer to another custodian without ANY distributions having been taken. THe IRS only requires the year of death RMD to be distributed before 12/31, they do not care whether it is distributed by the original custodian or the new custodian. The advisor does not appear to understand some of these points.