Inheriting an inherited IRA

Submitted by Bruce Claassen on Thu, 2019-08-22 22:33

My wife inherited a traditional IRA account from her mother, who had previously inherited this IRA from her mother (wife’s grandmother), so it’s effectively been inherited twice. The custodian says that because this IRA has been inherited a couple of times, it is no longer eligible to be rolled over into a renamed inherited IRA for my wife. It must stay in it’s current form and be liquidated under those rules. I cannot find any authority that backs this up. If this is in fact the case, does someone know where the authority is for this rule?



Submitted by Alan - IRA critic on Thu, 2019-08-22 23:27

  • The custodian is only partially correct. The non spouse inherited IRA should be re titled showing your wife (the successor beneficiary)  as beneficiary of her mother. The RMD schedule remains the same as her mother was using, in other words the divisor that applied to her mother continues to be reduced by 1.0 each year. Your wife’s age and/or life expectancy is irrelevant. If your wife wants to move the inherited IRA to another custodian, it cannot be done by rollover, it must be done by trustee to trustee transfer. See “death of a beneficiary” near the top of p 9 of IRS Pub 590 B. 
  • You might also summarize these rules by stating that your wife will be treated exactly as her mother would have been if she was still living. She should name her own successor beneficiary on the inherited IRA.
  • With respect to the correct RMD divisor, it is better not to assume her mother’s divisor was correctly determined. She should determine her mother’s age at the end of the year AFTER the year she inherited from her GM, determine the correct divisor her mother should have started with in that year and reduce that divisor by 1.0 for each year thereafter. Your wife is also responsible for completing the RMD of her mother for the year your wife inherited if her mother had not completed that RMD before passing.

Submitted by Kelli Peterson on Wed, 2019-08-28 13:49

In regards to your comment “Your wife is also responsible for completing the RMD of her mother for the year your wife inherited if her mother had not completed that RMD before passing.” — my question is how does this get reproted for taxes?  Should the RMD show up on the mother’s estate return (1041) or the daughter’s individual return (1040)? 

Submitted by Alan - IRA critic on Wed, 2019-08-28 14:36

IRA distributions always generate a 1099R issued to the recipient of the distribution, regardless of the nature of the distribution. Therefore the income will be reportable on the daughter’s 1040 if she was named as mother’s beneficiary. The 1099R would only be issued to her mother’s estate if mother had not named a beneficiary on the IRA and therefore her estate was the beneficiary. If the daughter then inherited through her estate, the income would typically be passed out of the estate to the daughter on a K 1, meaning the daughter would still be the one to pay the eventual tax on the distribution.  

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