First RMD from inherited IRA

Submitted by Olha Shevchenko on Tue, 2015-12-22 17:35

I am the sole beneficiary of a traditional IRA. The owner of the IRA died in 2014 at age 85. A RMD was taken for that year. I understand that I must transfer the IRA into my name and take a first RMD out by the end of 2015, the year following the year of the owner’s death.

I was told by a rep at the financial institution where I plan to establish my inherited IRA that this first RMD, payable to me (by the end of 2015) should be taken BEFORE actual transfer of the IRA into my name as an inherited IRA. Furthermore, I was told that this first RMD will be based on the life expectancy of the original owner of the IRA. This same person also told me that subsequent RMD’s (from 2016 on) will be paid according to the option I choose, which in my case would be to take them over the course of MY life expectancy. I wasn’t sure if this was the correct order of things.



Submitted by Alan - IRA critic on Tue, 2015-12-22 18:25

  • First, I’ll assume that you are younger than the decedent and a non spouse beneficiary. Since the only way to move a non spouse inherited IRA is by direct transfer, there is no distribution and therefore no RMD requirement from the current custodian before year end. That said, it is getting to be too late to do the transfer and get your RMD out before year end from the new custodian, so because of the late date you should take your RMD from the current custodian’s inherited IRA. Perhaps that is why the rep indicated you should do that.
  • The year of death RMD was completed and that was based on the decedent’s age. Your first beneficiary RMD for 2015 is based on the age YOU will attain as of 12/31/2015. The rep is incorrect, but perhaps was thinking that the decedent passed in 2015.
  • Again, there is no IRS rule that requires you to take your beneficiary RMD from the current account. But because we are down to the last week of the year, you should take out the RMD before doing the direct transfer to the new custodian. Make sure the funds are moved by direct transfer, because you cannot do it by rollover.

Submitted by Olha Shevchenko on Tue, 2015-12-22 20:53

Yes, you assume correctly. I am significantly younger and the child of the decedent. The problem I face is that the current custodian of the IRA does not provide the service of inherited beneficiary IRA’s, so the IRA remains solely in my mother’s name at this time. The current custodian of the IRA is a small credit union with limited IRA services. I don’t believe it is possible for me to take a RMD until the IRA is directly transferred into an inherited IRA account at another institution. The only other option would be to take a lump sum distribution, which I do not want to do. I am not sure what recourse I have except to make a good faith effort to get the direct transfer done in time so that I can take my first RMD. If that does not happen then I assume I will be responsible for some kind of penalty.

Submitted by Alan - IRA critic on Tue, 2015-12-22 21:16

If the current custodian will not retitle the IRA in a beneficiary format, that may result in a delay or other problems in transferring to another custodian with which you have set up an empty inherited IRA account to receive the transfer. This is the first I have heard of a firm not willing to hold and service an inherited IRA. Will this firm re title the IRA properly and just not issue a distribution, or are they also refusing to re title it? Will they re title it if you agree to transfer it out right away? While unexpected, this would make a real good case for the IRS penalty waiver and take some of the heat off the time deadline. As stated earlier, almost all IRA custodians do not wish to deal with estate inherited IRA issues and therefore try to push out a lump sum distribution, but you need to resist it unless everyone is OK with losing the stretch and having the entire balance taxed in the same year. Remember that any check made out to the estate is not eligible for rollover. While the RMD distribution in 2015 would be helpful to avoid another waiver request,  it is not critical.

Submitted by Olha Shevchenko on Tue, 2015-12-22 21:37

I have NO IDEA why this financial institution does not re-title IRA’s. It does sound quite odd, doesn’t it. I was actually quite surprised when I discovered this myself. I did not realize I would have to immediately transfer it to another institution or take a lump sum. It’s a small “Mom and Pop” credit union with limited services. Guess they need to get with the times! In any case I agree with you that it would make a good case for the penalty waiver if I can’t get it done in time. I am the sole beneficiary on this particular IRA so I am the only one making decisions about whether to take a lump sum pay-out. I of course would like to avoid that! I am unclear about the statement you make about any check made out to the estate being ineligible for rollover. I do not believe the estate is involved in this scenario since I am clearly the beneficiary of this IRA and will receive funds in the form of RMD’s once the inherited IRA is established. Perhaps I misunderstood something. 

Submitted by Alan - IRA critic on Tue, 2015-12-22 23:12

You are correct. If you were named directly (unlike the estate situation in the other thread), then the estate is not a factor here. But the situation is identical in that if any check is made out to you personally, you cannot roll it over and it will be irrevocably taxable, so you have to be careful to make it very clear that you are only interested in doing a direct transfer. If they will not retitle the IRA, that makes a direct transfer problematic. However, if you can get them to make out a check for the balance to “(name of new custodian) FBO shev inherited IRA”, they can hand you the check for delivery or you can mail it to the new custodian. One thing is critical and that is they need to understand that this qualifies as a non reportable transfer and they should not be issuing a 1099R as they would for a distribution. In other words, they cannot handle this as a distribution or it will all be taxed. This custodian must have run into this before and hopefully there is someone there that understands the rules for inherited IRAs even though they want no part of them. They should realize that their IRA clients probably expect that their beneficiaries will not become subject to unique non competitive policies of the CU.

Submitted by Olha Shevchenko on Wed, 2015-12-23 00:30

Thank you again for all the advice and the caveats. Much appreciated.

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