Inherited IRAs

Submitted by Jason Hochstadt on Wed, 2017-08-23 15:23

Client’s father recently passed away in his mid-80s. Client’s DOB is 12/27/1958; currently 58 but turning 59 before year-end. Client is a 50% beneficiary of father’s (1) Trad. IRA and (2) Roth IRA; client’s brother (4 years younger) is the other 50% beneficiary. Assume Roth IRA was in place for > 5 years

In terms of the RMDs, I just want to confirm the following:

1. Father’s 2017 RMD must be taken (if not prior to death) prior to any monies being directly transferred into an Inherited IRA for client.

2. A properly titled Inherited Traditional IRA (e.g. IRA FBO Justin Smith; Pershing LLC As Custodian; B/O John Smith Deceased; which is how Pershing titles their Inherited IRAs) and Inherited Roth IRA (e.g. Roth IRA FBO Justin Smith; Pershing LLC as Custodian; B/O John Smith Deceased) must be established. Assume this is done relatively soon – with separate accounts established as Inherited IRAs for my Client and his brother.

3. In terms of the Inherited Traditional IRA, Client must take his initial RMD by 12/31/2018 based upon age 60, life expectancy 25.2 on Table 1, Single Life Expectancy, because Client will turn 59 in 2017, the year of father’s death (even though Client is 58 when father passed away) – and reduced by 1 every year thereafter.

4. With respect to the Inherited Roth IRA, IRS Pub 590-B references the minimum distribution rules that apply to Trad. IRAs also apply to inherited Roth IRAs as though the Roth IRA owned died before his RBD. However, the designated beneficiary may stretch the payment over his life expectancy. Based upon the IRA RMDs if an owner died before RBD, does this mean Client must also take his initial RMD by 12/31/2018 based upon 25.2 life expectancy, reduced by 1 each year thereafter? Obviously, the Inherited Roth RMDs when taken are not taxable – how is this coded on Form 1099-R then?

Anything else I’m missing?

Your timely feedback is greatly appreciated! Thank you. Jason



Submitted by Jason Hochstadt on Wed, 2017-08-23 15:42

Hi, Along w/ the above:  Assume the funds are at TDAI and being moved to Pershing.Would Inherited Trad. and Inherited Roth IRAs need to first be established at TDAI PRIOR TO performing direct, trustee-to-trustee transfers over to Pershing?

Submitted by Alan - IRA critic on Wed, 2017-08-23 16:09

  1. The year of death RMD can be completed either before or after a transfer to an inherited IRA.  The IRS does not care as long as the beneficiary completes the year of death RMD. Either way, it will be taxable to the beneficiary who receives the funds. The year of death RMD can also be completed in any proportion by the two beneficiaries as long as the full year of death RMD is completed.
  2. There is flexibility in titling an inherited IRA as long as both the names of the deceased owner and the beneficiary are included. Custodians all have their preferred format to best match up to their processing platforms. In order for each beneficiary to use their own single life expectancy for beneficiary RMDs, the separate accounts must be created by the end of the year following the year of death and they can then use different divisors for their first beneficiary RMDs for the year following the year of death.
  3. This is correct. Beneficiary age is determined on 12/31/2018 for RMD calculation.
  4. There is no RBD for a Roth IRA thus all deaths are considered to be prior to the RMD, so a designated beneficiary will always have a choice between life expectancy and the 5 year rule, although LE is almost always the better choice. Therefore, client’s RMD divisor for the inherited Roth will be the same each year as for the inherited TIRA. Each inherited account must distribute it’s own beneficiary RMD meaning that even though the divisors are the same and the two IRAs are inherited from the same decedent, the beneficiary RMDs cannot be aggregated. Since the inherited Roth IRA is qualified, all inherited Roth distributions can be reported only on line 15a of Form 1040. Form 8606 does not apply. As for the 1099R, many custodians will not issue the Q code and instead will use Code T, however this does not affect client tax reporting as long as there is no question that the decedent made their first Roth at least 5 years prior to the first distribution to the beneficiary.
  5. Obviously, client should name their own successor beneficiary ASAP on both inherited IRAs. It is also possible that father might have had basis in the TIRA (Form 8606). If so, father’s recent tax returns would also have an 8606 to calculate the taxable portion of the TIRA RMD. Each beneficiary would then inherit 50% of the remaining basis and would then file their own 8606 to compute the taxable portion of beneficiary distributions.

Submitted by Jason Hochstadt on Wed, 2017-08-23 17:38

Hi Alan,Thanks for the reply.1. If father was in lower tax bracket then Client, wouldn it make sense for the RMD to be taken from Father’s IRA in 2017?  Or since Client is a 50% beneficiary, perhaps not since Client would get 50% of the amount inclusive of the non-taken RMD?  Since the IRA is split 50/50 by Client and his brother, if the RMD was not taken by Father could they take the RMD 50/50 in 2017 once separately Inherited IRAs have been established?  You reference the RMD being taxable to the beneficiary who receives the funds – would this be the case if the RMD was taken from father’s IRA (as wouldn’t it be taxable income to father on his 2017 income tax return)?2. What proof is needed to show the father had contributed to the Roth IRA > 5 years ago?3. Assume the funds are at TDAI and being moved to Pershing. Would Inherited Trad. and Inherited Roth IRAs need to first be established at TDAI PRIOR TO performing direct, trustee-to-trustee transfers over to Pershing?  Or can the monies be moved directly from father’s Trad. and Roth IRAs at TDAI into Inherited Traditional and Inherited Roth IRAs for Client at Pershing?4. So the initial Inherited Roth IRA RMD must be taken by 12/31/18 – just like the Inherited Trad. IRA RMD?Thank you!

Submitted by Alan - IRA critic on Wed, 2017-08-23 19:24

  1. It does not matter which IRA it comes from. Either way it will be distributed to client and will be taxable on client’s return at client’s tax rate. To get father’s rate, he would have had to take the RMD while living and report on his return. Client must coordinate with his brother to determine how much of the year of death RMD each will take if they do not take identical amounts. Inherited IRA custodians cannot make distributions until the inherited IRA is retitled and with two beneficiaries that is the best time to create the separate accounts for each using each SSN. Then those accounts can be transferred to a new custodian if desired. The RMDs can be taken from the new custodian accounts or before the transfer to a new custodian is done. Either way is fine with the IRS.
  2. No proof is needed. But beneficiaries should look into that so they know. All they would need to find is an old statement for any year at least 5 years back showing a Roth IRA. Maybe the custodian can confirm even if they will not provide a Q code.
  3. Yes. And TDAI will not even deal with the beneficiaries until they submit a death Cert and their contact info such as name, address, and SSN acceptable to the custodian. Once the inherited IRAs are retitled, each beneficiary can have their account transferred to their custodian of choice, perhaps Pershing for one but not for the brother. Best to request the transfers through the new custodian after setting up inherited IRA accounts at new custodian. If new custodian has a slightly different titling format than TDAI, that should not hinder the transfer.
  4. Yes, for both TIRA and Roth the year of death RMD should be completed by 12/31/2017 if possible. If not possible it is normal for the IRA to waive the penalty since determination of any shortfall takes time and some people pass late in the year. But if not completed in 2017 a 5329 form will have to be filed by the beneficiaries requesting a penalty waiver for “reasonable cause” . See last section of the 5329 Inst. First beneficiary year RMD must be completed by 12/31/2018. Any distributions are reportable and taxable in the year actually distributed per the 1099R that will be issued. As noted earlier, the Roth 1099R will be coded T or possibly Q, but will NOT show code 4. The TIRA will show code 4 (death distribution).

 

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