inheriting an inherited ira in 2020

Submitted by Robert Johnson on Wed, 2020-05-06 15:42

A client passed away in 2020 with 2 IRA’s, one a beneficiary IRA originally owned by her mother who passed away in 2018 and the other owned by my deceased client. Beneficiaries for both IRA’s are the client’s niece and nephew. Will the beneficiary IRA originally owned by the client’s mother be subject to the new 2020 distribution rules or will the prior RMD rules prevail?



Submitted by Alan - IRA critic on Wed, 2020-05-06 16:18

For the account inherited in 2018, when the beneficiary (Client) passes in 2020 or later, the 10 year rule will apply to the successor beneficiary. There will be no annual RMDs for the successor beneficiary but the inherited IRA will have to be drained by 12/31/2030. The IRA owned by the client will also be subject to the 10 year rule unless the designated beneficiary on that IRA is an “eligible DB”. In that case the beneficiary could stretch the IRA over their single life expectancy.

Submitted by Robert Johnson on Wed, 2020-05-06 16:55

Under old rules, 2 separate inherited IRA’s would have to be established for each of the 2 beneficiary’s and 2 separate RMD calculations made for each.  Under the new rules, could both the inherited IRA’s that will be moving to 2 separate beneficiaries be combined into 2 inherited IRA’s (one for each bene) instead of the 4 inherited IRA’s (two for each bene)?

Submitted by Alan - IRA critic on Wed, 2020-05-06 17:53

  • Very good question with a long answer. First, the old rules were less than clear as they referred not to combining accounts, but to aggregating the beneficiary RMD if inherited from the same “decedent”. It seems like the IRS did not factor in the possibility of an IRA being inherited several times, and therefore “decedent” eventually meant the original owner. Nonetheless, if an IRA is owned by A, B, and C, C inherited from B, not the original owner A. Therefore, the intent was to allow aggregation only if the RMD divisor is the same, and it would not be the same for the A->B->C situation as the B->C situation.  In this case, C will be subject to the 10 year rule unless C is an EDB. 
  • Another requirement is that the registration of the inherited IRA must correctly apply to each inherited account that is combined after determining that the RMD will be the same, or in this case the 10 year rule. The combined inherited IRA should be titled “C as beneficiary of B” as preferred by the IRS. But some custodian processing platforms may require a modification of the title. If they insist that A still be included in the title even though C did not inherit directly from A for either account, the title would misrepresent the actual situation. I doubt that this would generate an issue, but best to avoid even the possiblity.
  • In summary, if the custodian will title the IRA “C as beneficiary of B”, and the 10 year rule applies to C, there is no reason that the inherited IRAs could not be combined. Obviously, then C’s only successor beneficiary would apply to the combined account.

 

Submitted by Robert Johnson on Wed, 2020-05-06 21:14

Thank you for your advice.

Add new comment

Log in or register to post comments