Benificiary IRA- Buy/Sell Securities
Hi, I have moved forward rolling over my mother’s 401k into an inherited IRA. I had a couple of questions to understand how this works in 2021. I know that the stretch IRA has not been compressed to a 10 year required distribution period. But does the BIRA behave similarly to Roth IRAs when buying and selling securities?. Basically is this action tax silo’d (I can buy and sell securities without any tax liability at all). Of course I would pay the taxes when I take distributions.
Also now that I have transferred those assets to that account, are there any special measures I need to take that people often overlook? Any common mistakes? I just don’t want to miss anything that would incur a tax penalty or fee. Thank you for your help.
Permalink Submitted by Alan - IRA critic on Thu, 2021-08-05 15:47
First, if your mother was taking RMDs and did not complete her 401k RMD for 2021, you must complete that RMD before doing a direct rollover of the rest. You can either liquidate the 401k to cash or roll over the securities in kind as long as they are not proprietary funds for your 401k that the IRA could not accept. Any buying or selling within either account are not taxable or reportable transactions, only distributions out of the account that are not rolled over are taxable and you will get a 1099R for distributions. Your direct rollover (as long as you did not roll to an inherited Roth IRA) is reportable (1099R to be issued), but not taxable.
Too late now, but some inherited 401k accounts include highly appreciated employer shares or employer share units that could be utilized for NUA, with the gains on those shares taxed at the lower LTCG rate when you eventually sell them. But these shares cannot be rolled to an IRA without extinguishing the NUA option. While you probably did not inherit such shares that had high enough appreciation, you may not have considered this before doing the direct rollover.
The IRA that these funds are now in should include only accounts inherited from mother because you should not combine inherited IRA unless they are subject to the same RMD calculation. For example, you cannot combine this with another inherited IRA from your father who passed earlier since the RMDs would be different. Assuming that mom passed in 2021, you only distribution requirement is that the inherited IRA must be drained by 12/31/2031. You have no annual RMDs until 2031, but if the account is not real small, you might want to take distributions to spread out the tax liability each year instead of waiting until 2031.
The largest pitfall for all non spouse inherited retirement accounts is that you cannot do a 60 day rollover. You can transfer accounts directly if you wish (to another IRA custodian), but any distribution you receive will be taxable with no recourse.