Q&A: Significant Concerns with Inherited IRAs, International Beneficiaries & More

This week’s Slott Report Mailbag looks into international beneficiary IRAs, tax free IRA withdrawals, and inherited IRAs.  As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

Question: I have a question pertaining to if a IRA owner has taken part of their RMD but then dies before year end…..does that remainder have to be taken out in that year by the beneficiaries or can they do that distribution the following year with their first year having to do an Inherited IRA distribution?

Thank you -Carolyn

Carolyn, good question! The beneficiaries should take any remaining RMD before the end of the year. However, if the IRA owner dies late in the year, logistics may make that difficult, if not impossible. If, for whatever reason, the beneficiaries can’t do so, they should take the RMDs as soon as practicable and then file a Form 5329 to request relief from the 50% RMD penalty. There’s no guarantee, but there’s a really good chance the IRS will abate any penalties.

Question: Even if I don’t meet the 10% of annual income for tax free traditional IRA withdrawal to cover  medical expenses, can I still make a tax free IRA withdrawal for anything less than that? I do itemize. Thank you

Answer: There are no rules that would allow a tax-free withdrawal from a traditional IRA for any reason, including medical expenses. I think you’re referring to the 10% early distribution penalty exception for medical expenses. Note that the income tax and the 10% penalty are two different things. That said, if your medical expenses don’t exceed 10% of your income for you to be able to take the IRA distributions penalty-free, you also won’t eclipse the same threshold to be able to deduct your medical expenses. Thus, based on the limited info available from your question and reading between the lines, it sounds like any IRA distribution you take would be taxable and subject to the 10% early distribution penalty.

Question: The most cost effective way to sequester carbon (from a century plus perspective) is to plant trees in Iceland. (Major reason is leaf litter, fallen bark and wood do not decay much but are incorporated into the soil. Boreal forests hold much more carbon than temperate forests).

I want to leave my estate to Skogur, the Icelandic Forest Service. That includes my IRAs. In order to be a beneficiary on my IRA I need a tax ID # from Skogur. They are trying to get a US Tax ID # now, or I will use their DC embassy’s number. Skogur, as a foreign government entity, is tax free. But it is not a US registered charity.

I foresee no problems with my Roth and Inherited Roth IRAs going to Skogur, but what  of my traditional IRA ?

Thanks, Alan.

Alan, it’s not often I see a question for the first time anymore, but you’ve done it! Simply put, you can leave your IRA, Roth IRA or other retirement account to anyone, or any entity you’d like. So if Skogur is it for you, then you’re all set. Qualified charities, of course, don’t pay any tax, but if this is not a qualified charity, then the IRA distributions could be subject to US income tax. And of course, I have absolutely no idea what the tax rules are in Iceland… but I bet they’re really “cool” (sorry, I couldn’t resist). For more specifics, you may want to consult with an international tax expert or, if you can’t sleep at night, you can peruse the US-Iceland income tax treaty here.