Combining & Inheriting Inherited IRAs & Titling

Submitted by Cheryl Van Beek on Tue, 2016-10-18 14:28

When inheriting 2 Traditional IRAs (Bank CD) from the same decedent, as a Non spouse Beneficiary, if the decedent had two IRA accounts at the same bank—one she opened herself and listed this beneficiary and the other (also CD) that she inherited from her sister (so title currently lists both the most recent decedent’s and the sister’s name (from whom she inherited it) and also lists this beneficiary as account beneficiary (not in title), I believe the beneficiary should keep these account plans separate is that right? And in either case (combining them or keeping them separate), do all 3 names need to be on the Inherited IRA (that the most recent decedent inherited previously from her sister) or just the most recent decedent and the most recent beneficiary? Thanks.



Submitted by Alan - IRA critic on Tue, 2016-10-18 18:06

  • You are correct. These inherited IRAs will have different RMD divisors and the RMDs cannot be aggregated nor can the accounts be combined into a single inherited IRA account. The re titling of an inherited IRA in which the designated beneficiary has passed earlier need only include the name of the new successor beneficiary and the name of the first beneficiary. The original owner’s name can be dropped in the interest of space, but if the custodian wishes to include all 3 parties, that is also OK.
  • Note that IRS regulations indicate “inherited from the same decedent”. This is misleading because what they actually mean is “inherited from the same IRA owner”. In your example, the account was actually inherited from the same decedent (sister), but not from the same original owner. Many of these Regs were short sighted and drafted when IRAs were new. Apparently, the IRS neglected to address IRAs that are inherited more than once, but now this is getting more frequent. The IRS should clarify this, at least in Pub 590B if not in the actual Regs.

Submitted by Cheryl Van Beek on Tue, 2016-10-18 19:03

Just to clarify, the beneficiary can still take RMDS according to their Single Life Expectancy tables from both accounts in the above scenario, right? It’s just that the divisor is different because their prevoiuos year FMVs woud be different is that correct? Thanks again.

Submitted by Alan - IRA critic on Wed, 2016-10-19 00:24

Not correct. See the other post. If the divisor the deceased beneficiary used in their last year is accurate, that divisor would just be reduced by 1.0 for each year thereafter. However, the table should be checked at this time just to be sure that the deceased beneficiary was using the correct divisor. For the IRA inherited directly from the owner, the table needs to be checked for just the first year. Once the first year divisors for this beneficiary are determined, the table does not have to be checked again. 1.0 is deducted from the prior year divisor for each year thereafter.

Submitted by Cheryl Van Beek on Wed, 2016-10-19 02:27

Thank you but I may be  confused. The successor beneficiary should use the divisor that the most recently dceased was using (if correct)–even though that person was much older than the successor beneficiary? If so what is that called to instead of Single  Life Expectancy? And then for the IRA where the inherotor is the first inheritor of the IRA, that beneficiary may use the Single Life Expectancy Table and each year after the first RMD they would subtract 1– as in if divisor is 33.3 this year for their age, next year their divisor would automatically be 32.3 and so on?

Submitted by Alan - IRA critic on Wed, 2016-10-19 02:51

Yes, the successor beneficiary never gets to use their own life expectancy regardless of age. However, note that if the original owner died after the required beginning date and the first beneficiary was OLDER THAN the owner, that beneficiary would use the owner’s remaining life expectancy, not their own. Then when the successor beneficiary inherits, they will continue to reduce the owner’s remaining life expectancy divisor from the single life table by 1.0 each year. I did not mention this before because most beneficiaries are younger than owners or they are spouses. Was beneficiary 1 older than the account owner? As for the 1.0 reduction, it works like you posted. In your example, the successor beneficiary should verify that 33.3 was the correct divisor for beneficiary 1 because as you can see the rules are often confused. If beneficiary 1 was using the wrong divisor and taking out too much the successor beneficiary is not bound to continue that, but if they were taking out too little, that becomes a tougher problem.

Submitted by Cheryl Van Beek on Wed, 2016-10-19 04:02

 Yes, Beneficiary 1 was older than the original account owner who died after the required beginning date. So that means the most recent beneficiary/successor beneficiary must take RMDs according to the original owner’s remaining life expectancy and continue to reduce the original owner’s remaining life expectancy divisor from the single life table by 1.0 each year, is that right? But we’re still using the original owner’s remaining life expectancy from the Single Life Table even though we’re using the original owner’s age and not the beneficiary’s? I thought that table said it was for Beneficiaries?  So if original owner died in 2014 at 89, it looks like the life expectancy is 5.9, right?. Does that mean that the successor beneficiary uses a divisor of  3.9 for her first year RMD (2016) and then reduces it by 1 each year? And just to complicate this further, who we’ve been referring to as the Original Owner actually did inherit the IRA from her husband who died after required beginning date and was older than her. But that account title just showed her name I think it was treated as her own. So she’d still be Original Owner and nothing we’ve said would change right?  Thank you!

Submitted by Alan - IRA critic on Wed, 2016-10-19 04:44

  • Table I is used to calculate beneficiary’s RMDs, but in this case where the owner was younger than the beneficiary the owner’s age would still be used. This is a break because the distribution period is longer for the first beneficiary, but the second beneficiary must continue to reduce those divisors by 1.0 per year. To check the accuracy of the divisor determine the age the owner would have been at the end of the year of death, get a divisor for that year (even though it will not be used, and reduce that divisor by 1.0 for each calendar year after the year of death. This continues after the death of the first beneficiary. In your example 5.9 shows in the table for the year of death in 2014, for the first beneficiary RMD the divisor becomes 4.9 in 2015, 3.9 in 2016 etc.
  • Since the title of the IRA showed just the surviving spouse, the spouse assumed ownership or rolled it over to her own IRA, and is therefore treated as the owner. So that would not change anything.

Submitted by Cheryl Van Beek on Thu, 2016-10-20 00:28

Sorry to have to drill more but, wouldn’t the second beneficiary still still be reducing by 1 each year– same as the first beneficiary would do? So in above example 3.9 in 2016 for 2nd beneficiary too same as first beneficiary? Also, the tables don’t change– they’re the same each year it’s just the divisor that changes correct?  Thanks very much!

Submitted by Alan - IRA critic on Thu, 2016-10-20 01:27

Yes, as indicated “this (1.0 reduction) continues after the death of the first beneficiary”.  Just the divisors changes each year by 1.0 so no need to re check the table after the first year. The tables do change every 15-20 years, and when that happens instructions will be provided regarding any divisor adjustments..

Submitted by Cheryl Van Beek on Thu, 2016-10-20 16:12

When tables do change, where/how are the instructions provided? How would one know to look at the new tables to figure their RMD, if they’re no longer consulting the tables? Also, maybe I’m missing something but what happens when you get to a divisor below a whole number–say .9? Each year forward do you reduce by 1/10 of a point instead of a 1.0 reduction? Thank you for all your time and help.

Submitted by Alan - IRA critic on Fri, 2016-10-21 02:36

  • The IRS provides the instructions. For example with the new tables in 2002, for inherited IRA RMDs that had already begun with the 1987 tables, the beneficiary was instructed to adjust to the new table by using the new table for the divisor for the first RMD year and reducing that by 1.0 each year. Going forward the beneficiary would benefit from smaller RMDs under the new table.
  • In cases of very old beneficiaries when the divisor drops below 1.0, the IRA would be exhausted by the RMD. The rare exception would occur if the IRA gained enough in the current year to exceed the RMD.

Submitted by Ben Meyer on Fri, 2016-10-21 13:43

As Alan mentions above, it would be a rare exception where the IRA gained enough in a year to leave a balance when the divisor is less than 1.0.  To cover such cases, I have seen a number of plan descriptions that require a total distribution for a year with a divisor of 1.0 or less.  If this were not done, a real conundrum would occur in the following year, when the divisor goes to zero or negative.  The IRS rule in section 1.401(a)(9)-5, Q&A-5(c)(1) does not address this situation, except as a general consideration that the distribution period is measured by a non-spouse beneficiary’s remaining life expectancy, as established at the time of the death of the account holder or participant.

Submitted by Cheryl Van Beek on Fri, 2016-10-21 15:27

Alan said, “In cases of very old beneficiaries when the divisor drops below 1.0, the IRA would be exhausted by the RMD…” and Benn says, “except as a general consideration that the distribution period is measured by a non-spouse beneficiary’s remaining life expectancy, as established at the time of the death of the account holder or participant…” But in the case of the Non spouse second/successor beneficiary (as in above example) even though  she is more than 40 years younger than the original owner, since she must  take RMDS according to the original owner’s life expectancy (who died at 89) in 2014, the divisor would drop down pretty quickly to less than 1.0.So, I guess you’re saying that  unless there’s a large gain, the IRA would be depleted by that point? What if there is a large gain and it’s not depleted? Do you then ask the Custodian what the next distributions should be? Also, can I rely on the current Single Life Expectancy table in IRS to be correct for the original owner (who died at 89) in 2014? In other words that table hasn’t changed since then? And when you say the IRS provides instructions and since RMDS must be taken by the end of the year and not at tax time, how do become aware to look to IRS for instructions? Do you check their site every year before taking RMD to see if table may have changed? Thank you both.

Submitted by Alan - IRA critic on Fri, 2016-10-21 16:18

  • If any advisor or tax professional is hired, they should keep up to speed with any related RMD changes. Without either, the taxpayer might use Pub 590 B or other personal financial media sources. Since there are millions of people taking RMDs and the tables only change every 15+ years, when it happens it is well publicized.
  • Non depletion is once the divisor drops below one it highly unlikely. If the prior balance is 1000, and the divisor is .9, the RMD would be 1,111. If the account grows 15% before the RMD is taken, then 1150 less 1111 leaves 39 in the IRA, which would have to be withdrawn in the following year. If the divisor was .8 the gain would have to be 25% to leave a balance in the IRA. Of course, with any total distribution the RMD is deemed satisfied.
  • All the tables are correct at present. The tough part is knowing which table to use and all the associated rules which are much more complex than the actual math. Since it is now 15 years since the last change of tables, we are due for new tables sometime soon. That said, in the last couple of years it has been reported that mortality gains that have been fairly steady suddenly stalled out and for some groups actually declined. If mortality stays even for 10 years, then it will be another 10 years at least before new tables are released.
  • All of this may not matter much. For non spouse beneficiaries there is pending legislation now and there has been proposed legislation for at least 4 years to require non spouse non minor beneficiaries to use the 5 year rule, even if the owner passed after the RBD. The rationale for this is that an inherited IRA for a non spouse is not actually the retirement money for that beneficiary, rather it is no different than any inheritance. It was only retirement money for the IRA owner, and the nature of it changes at owner’s death. Of course, what this is really about is raising tax revenue to offset the cost of other legislation.

Submitted by David Mertz on Fri, 2016-10-21 16:27

Technically, the instructions are to each year look up the beneficiary’s first year divisor in the Single Life Expectancy table, then subtract from that the number of years that have transpired since the first year.  In other words, the table should be examined each year.  However, if one *knows* that the table has not changed since last year, one only has to subtract 1 from last year’s divisor to get the same result.  So instead of needing to know when the table changes, to shortcut the calculation you really need to know when the table has *not* changed, and doing so requires that you check each year.

Submitted by Cheryl Van Beek on Fri, 2016-10-21 19:45

One last thing (hopefully) on this example, in the above example All along, I have been assuming that the original owner would have been basing RMDs on Single Life expectancy which I think is correct, but , just want to be sure that seems right and not thta the should have been using the Uniform Life expectancy? The original owner took the IRA as her own when she inherited it from her husband who was older than her. She then named her sister as her beneficiary (most recent decedent). So which table should original owner have been using and most importantly which table should second/successor beneficiary be using. The successor beneficiary is not yet of age to have begun taking her own RMDs if that matters. Are there any facts I haven’t mentioned which need to be considered when deciding which table successor beneficiary should use in this case example? Thanks so very much again. 

Submitted by Alan - IRA critic on Fri, 2016-10-21 20:30

Original IRA owners or surviving spouses that assume ownership use the Uniform Table, or Table II if married to a spouse more than 10 years younger. But those two tables are not applicable to beneficiary RMDs, just Table I. The first non spouse beneficiary uses Table I and the successor beneficiary has to continue those RMDs based on the same Table I.

Submitted by Cheryl Van Beek on Tue, 2016-10-25 21:36

Ok so it seems since what we’re calling the Original Owner should have been using the Uniform Table since she was a surviving spouse who took the IRA as her own. Then when she passed away, her sister (who has sinnce passed away) inherited and should have taken per Table 1 per your answer right above this. But then you say that the Successor Beneficiary would continue RMDs based on that as well, but i thought earlier you said that the Successor Beneficiary would have to take RMDs according to Original Owner (First Sister)? Or maybe you’re saying the Successor Beneficiary (Non spouse) should take RMDS according to Table 1 but using the age of the first sister (Original owner since she took over deceased spouses’s IRA)? Thanks!

Submitted by Alan - IRA critic on Wed, 2016-10-26 00:00

Normally, the designated beneficiary is younger and the successor would continue to use the same schedule as the deceased beneficiary which was based on the age of the deceased beneficiary. But in this case, I thought you indicated that the deceased beneficiary was OLDER THAN the decedent who passed after the RBD, so the deceased beneficiary would have been using Table I but based on the lower age of the owner. The successor beneficiary would then continue on that schedule reducing by 1.0 each year. The age of the deceased beneficiary never comes into play in this this scenario. Original owner uses the Uniform table including for the year of death, deceased beneficiary swithes to Table I using the owner’s remaining life expectancy, and the successor continues on that schedule.

Submitted by Cheryl Van Beek on Wed, 2016-10-26 19:29

Okay thanks very much. I think I’ve got it.

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