inherited ira rmds

Submitted by Richard Fritts on Tue, 2016-03-22 22:16

If a rollover ira has multiple beneficiaries listed and each beneficiary decides to transfer their proceeds into their own inherited ira upon the original ira owners passing, does each beneficiary follow their own independent rmd schedule going forward (based upon their age) or do all beneficiaries follow the same rmd schedule based upon the oldest beneficiaries age?



Submitted by Alan - IRA critic on Tue, 2016-03-22 23:11

It depends. If the rollover IRA is owned and not already inherited, separate accounts for each beneficiary must be established no later than 12/31 of the year following the IRA owner’s death in order for each beneficiary to use their own life expectancy for RMDs. If the owner passed prior to the RBD, these beneficiaries also have a separate choice to elect the 5 year rule even if other beneficiaries do not. This is usually not beneficial, but is an option. Note that collectively, all these beneficiaries also have a requirement to complete the owner’s RMD for the year of death if the owner passed after the RBD. Collectively means that the total RMD can be taken in any combination and does not have to be distributed ratably to each beneficiary. If the separate account deadline is missed, the age of the oldest beneficiary who did not establish a separate account applies to those beneficiaries who did not establish the separate account by the deadline.

Submitted by Ben Meyer on Fri, 2016-03-25 23:07

How does this work in the situation where separate accounts are not created?  What would the title be for the combined account for several beneficiaries.  What SSN registration would it use?  Would the IRA custodian make separate RMD disbursements to each beneficiary?  Would the IRA custodisn also prepare and send separate forms 1099-R to each beneficiary, each with the correct SSN of each beneficiary?  This seems burdensome for the custodian, so I would believe the custodian would try to force out lump sum distributions.  Is this approach a rare occurrence in actual practice?  Thanks.

Submitted by Alan - IRA critic on Sat, 2016-03-26 00:56

  • These issues may vary between IRA custodians, but they cannot force out distributions like a qualified plan does. I believe that most IRA custodians will establish separate accounts as soon as they receive the data they need, such as the death certificate for decedent, SSN for beneficiary and contact information for the beneficiary. This is much clearner than the alternative which would be to maintain separate accounting shares in a single account so they know the 1099R amount for each beneficiary.
  • It if fairly commonplace for beneficiaries to not know they inherited an IRA for some time, sometimes even years, and I doubt that IRA custodians are willing to incur costs to locate them. In that case nothing happens, no distributions or RMDs are paid to those beneficiaries. There has been some discussion regarding interpretation of the IRS Regs for separate accounts that can be read to mean that ALL beneficiaries must establish such accounts and not just some of them. Every once in awhile an IRA Custodian will resist setting up separate accounts at different times and not want to act until all beneficiaries submit required forms and info. But most allow the beneficiaries to indepentently establish the accounts, and as a result those that do can use their own life expectancy, and those that do not meet the deadline must use the life expectancy of the oldest beneficiary that has not estabished the accounts. Of course, separate accounts can be set up anytime but if not done by the deadline for RMD determination the RMD will remain that of the oldest beneficiary.

Submitted by Ben Meyer on Sat, 2016-03-26 17:50

  • It must be a significant problem for an IRA custodian to administer an undivided inherited IRA that has not been split into separate accounts when there are multiple beneficiaries.  It looks like the custodian needs to distribute the annual RMD separately to each beneficiary in the correct percentage, and then issue each beneficiary a form 1099-R for his or her distribution.  To further complicate matters, each beneficiary may elect to receive a distribution beyond the RMD, up to the maximum percentage designated by the original owner.  Also, each beneficiary would be entitled to designate a beneficiary of his/her own.  All of this must be administered by the IRA custodian as one inherited IRA account holding the undivided interest of several beneficiaries.  
  • Does this actually happen, or do custodians handle such a situation in a different way?  The only simplification is that the RMD for all beneficiaries is determined by the remaining life expectancy of the deceased original owner.  And even then the custodian can’t force out the RMD since the beneficiaries might possibly have other inherited IRA accounts from the same decedent also reckoned on the decedent’s remaining life expectancy.
  • The only way I see the a custodian would be able to handle this type of situation is to divide up the original account into separate accounts solely for administrative reasons, even though not requested by 12/31 of the year following the owner’s death.  The RMD would still be reckoned using the decedent’s remaining life expectancy for each separate beneficiary account.

 

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