Slott Report question re: IRA beneficiaries split between people and a charity

Submitted by Ginny Trautman on Sat, 2022-06-25 14:55

First, I’m not a financial professional.

In the answer to Brandon’s question in this Slott Report

https://irahelp.com/slottreport/5-year-rule-and-multiple-beneficiaries-todays-slott-report-mailbag

it says

“After death, you have until December 31 of the year after death to split the account into inherited IRAs or, in this case, to cash out the charity. As long as the charity is timely cashed out after death and the remaining beneficiaries have individual inherited IRAs set up for them before the deadline, they will not be negatively impacted and can follow the payout rules applicable to living people.”

Investopedia and Barron’s disagree and say the charity has to disclaim or take their portion by Sept 30th of the year after death. The persons then have until Dec 31st.

https://www.barrons.com/articles/for-401-k-and-ira-holders-sept-30-is-key-deadline-for-beneficiary-designations-51600261201

https://www.investopedia.com/articles/retirement/03/091003.asp

Which is correct?

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Permalink Submitted by Alan - IRA critic on Sat, 2022-06-25 20:04

The key here is the exact requirement to be met to establish a separate account, which is not totally clear. The Slott report response assumes that when the charity receives a total distribution by 12/31, since the only beneficiary left is the individual then the individual is treated as having established a separate account by the deadline. The conclusion would differ if there had been two individual beneficiaries remaining when the charity received the total distribution, since in that case the individuals would not yet have separate accounts.
A similar gray area occurs when there are multiple individual beneficiaries. Pub 590 B refers to establishing separate accounts for EACH beneficiary, but there is no clear guidance in the separate account Regs in 1.401(a)(9)-8 that requires that ALL beneficiaries must do so. Therefore, if there are 3 beneficiaries, and only one creates a separate account, then that beneficiary should receive separate account treatment, while the other two do not.
The Secure Act Regs do not change the separate account rules, nor do they clarify them.

Permalink Submitted by Ginny Trautman on Sat, 2022-06-25 20:59

Thank you so much for answering. It sounds safer to avoid confusion by opening a second IRA to leave money to both people and charities.

Permalink Submitted by Bruce Steiner on Sun, 2022-06-26 18:37

The charity will almost always have a separate account within the meaning of the regulations in the sense that income and gains will be pro rata. IRA custodians generally won’t accept designations of dollar amounts. They generally require percentages or fractions. That’s because, unlike in an estate where the executors decide which assets to sell or use to fund dolllar amount bequests, there’s no one in an executor-like position as to an IRA.