Inherited IRAs, Naming Beneficiaries Highlight Mailbag

By Marvin Rotenberg, IRA Technical Expert

The holiday season is upon us. It is time for friends, family and financial security. The answers to these consumer questions can help you wrap up your year-end planning. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure.

1.

Hello –

I am an elderly woman with not much longer to live due to serious illness and would like to arrange my several IRAs with my 6 grandchildren as designated beneficiaries. I would like to divide all the IRAs equally and leave instructions for my grandchildren as to what to do after my death.

Questions:
1. How should they be titled if divided now?
2. If desired, can one or all of them “cash out” of their share?
3. If they choose to keep the money in the separate IRAs, must my name remain on it?

Thanks so much for your help.

Sincerely,

Esther Deitz

Answer:
1. For simplicity you can name your six grandchildren as primary beneficiaries of your IRA in equal shares. Upon your death they would establish separate inherited IRAs. However, if any of the children are minors this can create other problems as minors cannot make the necessary decisions for handling an inherited IRA. If divided now, the account title would remain the same as it currently reads, you would simply have a different beneficiary on each account. Check to make sure your IRA custodian will recognize each beneficiary and not give all the IRA money to just one beneficiary.

2. As a beneficiary and/or after reaching their majority, they would have the right to withdraw any amount they choose. In order to prevent them from having that right you might want to consider naming a trust as beneficiary. This is considerably more difficult and you should seek the advice of a professional familiar with a trust as beneficiary of an IRA.

3. Yes, by December 31 of the year following your death they would set up separate inherited IRAs. Your name would remain in the title adding your date of death and “for the benefit of the name of the grandchild.” Their social security number would also be added to the inherited account.They would then be able to stretch payments over their individual life expectancies.

2.

Dear Ed,

I have both a Traditional IRA and a Roth IRA. I would like to rollover a portion of my Traditional IRA to my Roth IRA. Should it be rolled over to the existing Roth IRA account or to a separate new Roth IRA account? I do not want to lose the ability to recharacterize the rollover should my investment diminish. Does putting the rollover money in an existing account disallow recharacteriztion?

Best Regards,

Mark Minassian

Answer:
The fact that you might want to recharacterize means that you should consider establishing a separate Roth IRA for the amount being converted. If you use the existing Roth IRA for the conversion amount it would not prohibit you from recharacterizing. It would, however, make it more difficult because you would have to consider all the assets in the account for gains and losses that must be attributed to the amount being recharacterized.

3.

Ed and Company,

I have read several of your books but have not seen this question or answer.

It’s easy to avoid estimated income-tax penalty when converting to a Roth in 2010 and opting to pay tax in 2010 by using the 110% rule. How does a person opting for the default of deferring taxes on the conversion to 2010 and 2012 calculate estimated income-tax to avoid penalties?

Thanks,

Tom

Answer:
The simple answer is you can continue to use the 110% rule. However, you should consult your tax advisor based on your own individual situation.

4.

I am in process of engaging a financial advisor. I am a widow, and I inherited money from my brother this year. I inherited his traditional IRA ($300,000)-(now a BDA) and a small Roth IRA ($2,200). I made no changes yet except for assigning my beneficiaries. My investment company determined my life expectancy using my age of 78 yrs, and the amount of RMD (required minimum distribution) to withdraw in 2010 (traditional $14,899.58 before taxes). The traditional IRA funds are in cash reserves except approximately $21,000 in stock. The Roth IRA money is all stock ($2,200) but $80 was transferred in addition to the above noted as an RMD.

I have paid to date on the traditional IRA $2,234.92 in federal taxes and $1,489.96 in state taxes.

Prior to this inheritance my income was $13,000 a year– a low income. The RMD will increase my income less the taxes already withheld this tax year. Am I in the 33% bracket?- if so only 15% and 10% are currently being withheld from the RMD paid to me, so I probably owe fed and state taxes on the 2010 RMD.

My question is: as an inherited IRA is it correct that I cannot roll all of the funds over to a Roth IRA? I should inquire, but how was my RMD distribution determined exactly? Any information is greatly appreciated.

L.R. Thomson

Answer:
You did the right thing by naming your own beneficiary on the IRA. Your RMD on the IRAs would be based on your life expectancy factor, found in IRS Publication 590, Single Life Expectancy Table, based on your attained age the year following your brother’s death. That factor would be divided into the prior 12/31 account balance to determine your RMD amount. The RMDs on the Roth IRA are calculated in the same manor however they would be income tax free.

You are correct that the traditional IRA you inherited can not be converted to a Roth IRA. You might want to consult your tax advisor about your tax bracket and the amount withheld from your RMD.