Slott Report Mailbag: Who Has Rights of This Inherited IRA?

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

Retirement planning is complicated. It’s a personal and situational endeavor with plenty of possible pitfalls in the way of success. This week’s Slott Report Mailbag illustrates several various situations in which the individual sought help from either publications or professionals and is still left confused.  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.

Hello Mr. Slott,

My grandmother passed away last year and the trustee for her estate decided that her Traditional IRA would be distributed to the beneficiaries via individual inherited IRAs. The IRA custodian sent me, as my mother’s attorney in Fact, an application to establish an account with their company.

As I was filling the application out, I eventually came to the Designated Beneficiaries form. Since we live in Texas, a community property state, the form requires that if the primary beneficiary is not my mother’s spouse, then spousal consent is required to name someone else.

I challenged the presumption that my step-dad has any community rights to this IRA, because it is inherited and therefore separate property.

They responded that his consent is necessary due to “IRS rules for community property states.” However, I haven’t been able to find any IRS publications, rules, guidelines, etc. that specifically address this issue.

My issues are:

1. I don’t want to cash out the IRA. I would rather take the annual distributions.
2. This inherited IRA is none of my step-dad’s business. I don’t want him to know about it or even think for one minute that he has any kind of claim or rights to it.
3. I could ask my step-dad to sign the consent form, but I am almost certain he would either decline or use it as leverage to have my mom sign away her legitimate spousal rights to his community property IRAs.

Is there any state or federal law, publication, court case, declaration, etc. that I could make reference to that would convince this IRA custodian that spousal consent for this inherited IRA is unnecessary?

Any insight or suggestions you could provide would be greatly appreciated.

Answer:
We’ll assume the estate was the beneficiary of your grandmother’s IRA and therefore the executor of her estate is handling the IRA. Community property rights are a matter of state law. Whether your father has spousal rights on your mother’s inherited IRA is a matter of Texas law. As your mother’s Attorney-in-Fact, you may need to consult a lawyer with knowledge in Texas community property rights to help determine who your mother can name as a successor beneficiary (the beneficiary’s beneficiary). There is no requirement to cash out the IRA. You should explore the possibility of assigning (transferring) the IRA through the estate to your mother as the estate’s beneficiary. This direct transfer would be a tax-free transfer, which would allow the estate to close and your mother to not have to cash out the IRA. She could then take IRA distributions over your deceased grandmother’s remaining single life expectancy (assuming your grandmother died after her required beginning date). Your mother cannot use her own life expectancy because she inherited this IRA through the estate.

2.

I hope you are able to give me clarity on this question because I’ve spoken to multiple CPAs and read for over an hour on the IRS website and feel like I’m more confused now the when I started. I’m in my 30s, left my job this year and rolled my Roth 401(k) that had a basis of about $30,000 and account value of about $45,000 into a new Roth IRA. Can I withdrawal the 30k basis without taxes and penalties? I have had 2 CPAs tell me that 1/3 or $10,000 would be subject to such penalties/taxes because it is a ratio, but then I’ve had 2 other CPAs tell me that they were wrong and that it doesn’t matter that it came from a Roth 401(k) originally and that you can always withdrawal the basis from a Roth IRA and it comes out first. Can you help shed some light on this for me please?

Answer:
If the withdrawal was made from the Roth 401(k), then the ratio method would be used; but once funds are in the Roth IRA the Roth IRA ordering rules will apply. Assuming the Roth 401(k) distribution was non-qualified; the $30K basis is treated as basis (contributions) in the Roth IRA and thus can be withdrawn anytime without taxes or penalties.

3.

I left a former employer 10 years ago with a 401(k). It informed me 4 years ago that I would have to move my 401(k) to another plan. I moved the funds to another 401(k) plan. As I am approaching age 70 ½, I discovered that I don’t know the cost basis of my 401(k). I contacted my original employer and they said they no longer do business with that company and do not have any records. Where do I go from here?

Answer:
Check to see if you were issued a statement or IRS Form 1099-R for the year you moved your 401(k) plan funds to another plan. That statement or Form 1099-R should show if you had any basis (after-tax amounts in the plan). The plan administrator was required to issue this form when you moved your funds and the new plan administrator would be required to account for after-tax funds separately in the new 401(k). If you cannot prove basis, subsequent distributions will be fully taxable.

If you are looking for cost basis – the cost of the investments when purchased by the plan – that number is normally irrelevant in retirement plans as distributions are taxed as ordinary income. The cost basis will only matter if you want to do a distribution of NUA (net unrealized appreciation). Since you moved your 401(k) to another plan, you are not eligible to use NUA.