IRA beneficiaries taking proceeds
We have an IRA on Schwab. the owner passed and his 3 children are inheriting the proceeds equally. We are being told they have to move each portion to an Inherited IRA before they can touch any funds. If they choose, can’t they just be paid out and pay the taxes directly from their Dad’s IRA? And avoid even creating their own inherited IRA?
Permalink Submitted by Alan - IRA critic on Mon, 2025-06-02 16:53
No. Almost all IRA custodians require distributions to be made from a separate inherited IRA account for each beneficiary. This means that for a given account distributions can only be reported to a single SSN and for the IRA owned by the decedent that was their SSN. Therefore, each beneficiary will have to open a separate inherited IRA under their SSNs to receive any distributions, even if a full distribution is requested the next day. Distributions will then be reported on a 1099R with the recipient’s respective SSN and the inherited IRA AC # shown on the 1099R. Of course, the death Cert for the owner and each beneficiary’s contact info and SSN will have to be provided before Schwab can set up the inherited IRA accounts.
If the decedent passed after their RBD and did not complete the year of death RMD before passing, the children are jointly responsible for completing that RMD. Jointly means in any combination, so if one child wants to take a total distribution of their share that will more than complete the year of death RMD.
It would be rare that all of the children would want to cash out unless the inherited IRA was quite small.
Permalink Submitted by Herm Brames on Tue, 2025-06-03 14:20
If the IRA is a ROTH and the beneficiary is an Irrevocable Trust with the children as equal beneficiaries of that Trust, would the Trust beneficiaries be responsible for establishing the separate Inherited ROTH accounts? Upon death of the ROTH owner, the Trust not the beneficiaries owns the ROTH. How does this work?
Permalink Submitted by Alan - IRA critic on Tue, 2025-06-03 17:08
The terms of the trust would determine if the trustee of the trust is allowed the discretion to distribute the IRA out of the trust to the trust beneficiaries. The trustee is the only one with authority to do this. If so, the procedure is basically the same as an executor would use in the above posts. Again, this would not change the RMD requirements, it would just transfer them to the inherited Roth IRA beneficiaries.
One difference from the above is that a Roth owner always passes prior to RBD, so the LE of the decedent is not used, and there are no annual RMDs in years 1-9 of the 10 year rule. If the trust was not qualified, the 5 year rule would apply.
Permalink Submitted by Herm Brames on Wed, 2025-06-04 10:31
I am confused by your last paragraph. I have been of the understanding that for a ROTH IRA left to an Irrevocable Trust for the benefit of an individual non-spouse beneficiary there would be no distribution requirements for 10 years after the year of death of the owner of the Trust if the Trust required accumulation of tax-free earnings for 10 years. Then, at the end of 10 years the entire account would be distributed tax-free to the Trust and thereafter the account is no longer a ROTH IRA and no annual distributions are required, but annual earnings on the investment are taxable to the beneficiary if distributed or to the trust if accumulated.
So, are there different distribution requirements for a ROTH IRA left to an individual beneficiary versus to several beneficiaries? If so, would the answer be to avail of the 10-year tax free accumulation and establish individual trusts for each beneficiary?
Permalink Submitted by Alan - IRA critic on Wed, 2025-06-04 15:48
Good catch. You are correct, there would be no annual RMDs to the (qualified) trust, just the 10 year rule, same as if there were no trust. This applies whether the trust accumulates or annually passes through the distributions to trust beneficiaries. Since the Roth will continue to generate tax free gains, it would be preferable to not touch the Roth IRA until year 10.
Will edit out the error in prior post.