Non-spousal inherited Roth IRA question
Hi Friends,
Yvette, fiduciary IAR from NY, now in CA. Hoping everyone is doing great. I’ve been thrown a curveball and could use your advice on 2 different cases. First one:
I’m helping a family of 5 siblings settle their parents estate, and in doing so, the 5 of them inherited their father and mother’s 2 Roth IRA accounts. There is about $800,000 in total. Our first step was to set them all up non-spousal inherited Roth IRA accounts at Schwab, so they can receive the funds. They did. They were given disproportionate amounts, and agreed among themselves, to share the money equally, which they have tasked me with doing.
I need to figure out how, since Schwab was not much help. I asked for internal transfer forms, and Schwab gave this response:
” the Inherited funds can be moved into an IRA account in the beneficiaries name, but then would need to be transferred to a non-qualified account from there. From the non-inherited IRA account, they then can be sent to another person’s Individual account, but not another person’s IRA account
Basically: TR’s Inherited account goes to TR’s IRA account, then to Terry’s Individual account for example.”
I’m not sure I understand their “extra step” of creating IRA accounts for each person. Why? As regards the rules of NON-spousal inherited Roth IRA’s, am I correct in my understanding that if they all want to take the money out, they can, and then the money is just “regular money” with no more IRS / Inherited Roth rules attached? Not sure I understand the minutia on this one.
Second case is similar. Non-spousal inherited IRA. From the client’s mother who died 4 years ago. He has the funds in an annuity that was with Guggeheim. They got bought out and the new company is Clear Spring, not doing anything for him. We want to move the funds to another annuity, but, no companies worth a darn want to touch a non-spousal IRA. If we take it out, he will be taxed. Can you make any suggestions on how to best handle this so he may not feel the tax impact? Leaving it where it is, is not an option for him. It’s $209,000.00 , he lives in Arizona, and is 70. Does not need the income, but wants it secure…and he is in a higher bracket, as a high income earner. Gross pensions alone are $200k annually. Thank you!
Permalink Submitted by David Mertz on Fri, 2024-03-08 00:48
Non-spouse beneficiaries are not permitted to move the funds into their own IRAs, only to another inherited IRA for the beneficiary’s share, maintained for the benefit of that beneficiary, and only by nonreportable trustee-to-trustee transfer. Perhaps this is what was meant by Schwab. To share equally, each beneficiary would have to take distributions taxable to themselves and then gift amounts to other siblings to redistribute the money, potentially requiring gift-tax returns to be filed depending on the amounts of the gifts. What they are also not permitted to do is reallocate funds between inherited IRAs maintained for different beneficiaries.
It’s also necessary to keep the IRAs inherited from different decedents separate and inherited traditional IRAs separate from inherited Roth IRAs.
In the second case, it would be unusual that the IRA annuity would still exist if the annuity had been annuitized, so the fact that it’s an annuity, likely a deferred annuity, is probably irrelevant. Because it’s an IRA inherited by a non-spouse beneficiary, it seems understandable that no custodian would want to establish an inherited IRA annuity due to the RMD requirements.
Permalink Submitted by yvette spillman on Fri, 2024-03-08 02:32
Hi Thank you. I’m not following you on the first question… the beneficiaries have all recieved Inherited ROTH money. So why would the distributions be taxable to them? Thanks.