Required Minimum Distributions, Stretch IRA Beneficiaries Highlight Mailbag

By Marvin Rotenberg, IRA Technical Expert

This week’s Slott Report Mailbag includes questions on Roth conversion options from a company plan, spousal rollovers, and Roth recharacterizations. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure. Find one in your area at this link.

1.

I’m responding to an article I read in the newspaper dealing with IRAs transferring to beneficiaries. My question is this. My mother is already retired. Her IRA is out of the company and with a financial institution. It is set up with the stretch option. When I become the receivership of this account, I plan on using the stretch feature. I understand that with the stretch feature, I receive the same distributions as my mother is receiving. This way, there would be no problem with taxes as with a lump sum distribution. Is this true?

Answer:
If you are the primary beneficiary of your mother’s IRA, you could choose to inherit the account and take required minimum distributions (RMDs) based on your single life expectancy commencing the year following her death. For example, if you were age 50 the year after her death, your life expectancy, based on the Single Life Expectancy Table found in IRS Publication 590, would be 34.2 years. That number (34.2) would be reduced by one each subsequent year.

It’s very important to establish the inherited account properly at her death. The title of the account should have your mother’s name in it as well as your name.

Here is an example:

Her name IRA deceased, date of death, FBO your name. This avoids a lump sum distribution, and only the amount distributed to you each year is taxable.

2.

If I convert some funds from a traditional IRA to a Roth this year, can I 
add to it next year before April 15 and have the additional amount count as
part of this year’s conversion? I might want to do this because I won’t know, until I do my taxes for this
year, exactly how much I want to convert.

Answer:
You can convert part of a traditional IRA and then convert another part at a later date. However, you do not have until April 1st of the following year to count it in the prior year. That would only apply to contributions. The money must come out of a traditional IRA by December 31, 2011 to count as a 2011 conversion. If by tax time you decide you converted too much, you have until October 15, 2012 to recharacterize any or all of your 2011 conversion. Recharacterizing simply means undoing the conversion.

You can add future conversions to the same account, but that could create complications if you then need to recharacterize those later conversions.

3.

Hello,

A friend’s uncle died in March of this year. He was in his 60s (age). She inherited a portion of his Traditional IRA and moved it to an IRA-BDA account. She is in her late 40s (age). Does she have to take an RMD by the end of 2011?

My understanding is that the owner of an IRA-BDA account has to start taking RMDs the year after the death of the IRA owner. In this case, that would be by the end of next year. Is this correct?

Thanks for the help.

Answer:
You are correct. Her RMDs from the inherited account must commence the year following the uncle’s death. He was not in pay status at his death so there are no RMDs to be taken the year of his death.