Inherited IRA questions and request for further reading

[Tenlha]

Hello, anyone have a good resource to help me understand how inherited IRAs work (they are not Roth)? I need to know from the standpoint that I am named on some of my parents'. I know not to withdraw it all at once, but I have questions about it, since I have elder siblings also named, and that seems to affect monthly distribution amounts based on the oldest's age. Also, can you roll these over on the ladder or no? Parents are both over 75. We are designated beneficiaries and so they are not part of the estate.

[seattlecyclone]

In general, these inherited accounts work similar to a regular pre-tax IRA: money is taxed at your regular income tax rate when you withdraw it. Transactions that occur within the account are not taxed. You must take required minimum distributions each year regardless of your own age. There is no early withdrawal penalty from the inherited account. You cannot convert an inherited IRA to Roth. That would need to be done before your parents' death.

You can (and probably should) split this money up into separate accounts for each beneficiary. You have until the end of the year after the original owner's death to do this. The main benefits are twofold. First, the required distributions will be based on each heir's age, not the age of the oldest beneficiary. Second, you won't have to agree with your siblings about investment strategy and withdrawal timelines; everyone gets to do their own thing.

Anything else you want to know?

[retiringearly]

I inherited an IRA from my Dad.  You definitely want to split the inherited IRA in to separate accounts for each beneficiary. 

You have to calculate the required minimum distribution (RMD) every year after you inherit the IRA.  There RMD is based on your age and the amount in the IRA - the RMD increases if the IRA grows in value.  There is a calculator on Schwab.com that does the calculation based on the factors you enter.

[Tenlha]

Yes, I will split them into separate accounts. My dad is telling me that the RMD is based on the eldest's age, regardless. Where can I find all these rules? I feel like I need to study up before it happens so I don't make a serious mistake.

[Spork]

I'm just starting to deal with this.  I am just as likely to be wrong as correct.  You're warned.

My understanding is: If you do split this into separate inherited IRAs, the RMD is based on each individual as seattlecyclone said.  There is a time limit on doing that... and IF you don't all get it done, THEN it is based on the eldest's age. 

There are also tax implications if the RMD hasn't been taken in the year of the death.  If not, YOU ALL HAVE TO TAKE THE RMD.  I vaguely think there are oddball penalties if one in the group doesn't take it.  In other words: best case is the decedent takes his/her RMD before death.   

[NoCreativity]

Read this, over, and over, and over, and over. and...

https://www.irs.gov/publications/p590b/ch01.html



also -

1. Don't worry about it if your parent's are still alive?

2. if one parent is still alive, the other's IRA can be used as their own (unless you are named as the 100% primary beneficiary I guess), so that's more time for you not to worry about it.

3. Encourage your parents to have a simple investment plan with the company holding the IRA, so you won't have to deal with 30-40 wonky funds or other products after it is transferred to you.

4. make sure you or your parents know when they are required to begin distributions on the IRA.

[Frankies Girl]

I'm just starting to deal with this.  I am just as likely to be wrong as correct.  You're warned.

My understanding is: If you do split this into separate inherited IRAs, the RMD is based on each individual as seattlecyclone said.  There is a time limit on doing that... and IF you don't all get it done, THEN it is based on the eldest's age. 

There are also tax implications if the RMD hasn't been taken in the year of the death.  If not, YOU ALL HAVE TO TAKE THE RMD.  I vaguely think there are oddball penalties if one in the group doesn't take it.  In other words: best case is the decedent takes his/her RMD before death.

This is correct - Split into separate accounts and each person should have their RMD calculated according to their own age at that point. But if you don't get the RMDs sorted out, they can and will make you take the entire amount in the IRA within a 5 year period. So within a month or so after a parent's death, get it sorted (unless it's the end of the year, and then get it sorted BEFORE the end of the calendar year especially in regards to whether the parent took their RMD before they died - that HAS to be done or else - penalties!!)

 And you can create your own account at the current company (financial group) and then have it transferred over to someplace else (like Vanguard) once you get the account in your name at the other place.

I had to go through this when my father died.

[Tenlha]

Thank you all for your advice. I will take it all, with the exception of not worrying about it until they are dead. That seems a recipe for disaster. I'm going to plan it all out now and read that link carefully.

Thanks again!

[Tenlha]

And you can create your own account at the current company (financial group) and then have it transferred over to someplace else (like Vanguard) once you get the account in your name at the other place.

If I did this, could I then roll it over on the ladder?

[Spork]

And you can create your own account at the current company (financial group) and then have it transferred over to someplace else (like Vanguard) once you get the account in your name at the other place.

If I did this, could I then roll it over on the ladder?

My understanding is: No.  It is never "your" IRA.  It will always be Bob Smith IRA FBO Tenlha.

[seattlecyclone]

More to the point, the "ladder" isn't necessary because there's no early withdrawal penalty in an inherited IRA. Just take what you need out of there when you need it without the five-year lag time.

If you want more money in Roth accounts, do conversions out of your own IRA.

[Tenlha]

Ok.

Just found out my Dad takes his RMD in late December every year. Is there any reason he shouldn't take it earlier in the year?

[Frankies Girl]

And you can create your own account at the current company (financial group) and then have it transferred over to someplace else (like Vanguard) once you get the account in your name at the other place.

If I did this, could I then roll it over on the ladder?

My understanding is: No.  It is never "your" IRA.  It will always be Bob Smith IRA FBO Tenlha.

Confirming this is also correct. My inherited IRA is still titled with my dad's name in there - it technically is my IRA, but as it is an inherited IRA it is completely separate and can not be combined with any of my other accounts, even if I inherited an IRA from my mother - that would have to be a completely separate inherited IRA from the one from my dad.

Now I did have two different IRAs from my dad and could combine those into one account - but that's it as far as what you can do with it.

But an inherited IRA is actually a good "hybrid" account. It is tax sheltered pre-tax money (not that you can contribute more to the account), but you can pull from it too no matter how old you are as long as your parent was taking distributions before their death (or starting the year of).

I have a taxable for "now" money, am counting on my Roth/rollover IRA (formerly my 401k) as my "old lady" money, and the inherited IRA is my "gap coverage" money - as needed.



And no, his timing on his RMD is fine if he's not needing the money earlier in the year. I have my own and my mom's set to distribute in December too (just makes sense if you're not desperate for the money to leave it in the account as long as possible so it can stay invested/working making more money).

[oldmannickels]

Ok.

Just found out my Dad takes his RMD in late December every year. Is there any reason he shouldn't take it earlier in the year?

Usually people do that because you don't have to take the RMD if you die during the year. :(

[Spork]

Ok.

Just found out my Dad takes his RMD in late December every year. Is there any reason he shouldn't take it earlier in the year?

Usually people do that because you don't have to take the RMD if you die during the year. :(

Actually: You do. 

If you don't take the RMD, the people that inherit it DO have to take it.  From a tax perspective, it's better if the actual IRA owner takes it rather than several inheritors each having to take an RMD out of their share.  (I believe if one of them doesn't do it, there are consequences for all.  I might be wrong on that part.)

As my dad was in hospice, his accountant and his investment advisor (both friends of his) kindly nudged us and said "You should use power of attorney and take the RMD now and just move the money into the estate."

[Tenlha]

Actually: You do.

If you don't take the RMD, the people that inherit it DO have to take it.  From a tax perspective, it's better if the actual IRA owner takes it rather than several inheritors each having to take an RMD out of their share.  (I believe if one of them doesn't do it, there are consequences for all.  I might be wrong on that part.)

Yes this is my understanding as well. If there is no penalty or other reason not to, then I would like to have him take it in June or July, or even earlier. I don't want him to do it every December, as it would be difficult to be grieving and have to rush rush rush to get all this organized.

[Frankies Girl]

Actually: You do.

If you don't take the RMD, the people that inherit it DO have to take it.  From a tax perspective, it's better if the actual IRA owner takes it rather than several inheritors each having to take an RMD out of their share.  (I believe if one of them doesn't do it, there are consequences for all.  I might be wrong on that part.)

Yes this is my understanding as well. If there is no penalty or other reason not to, then I would like to have him take it in June or July, or even earlier. I don't want him to do it every December, as it would be difficult to be grieving and have to rush rush rush to get all this organized.

The reason to wait to the end of the year is to allow the money to work harder in the tax sheltered IRA. It is to your father's benefit to wait to the end of the year before taking an RMD.

I'm saying this in the nicest possible way tho: Unless your dad is in hospice or something right now and going to die soon (in which case, I'm very sorry), worrying him about taxes and RMD timing right now - not for his sake but because you want to streamline things for your own inheritance - is morbid and a little disturbing.

You'll know this stuff now in the back of your mind and can deal with it when it happens. The only reason the RMD timing would be any kind of an issue is if your dad dies before taking his RMD and it is right at the end of the year - which is just such a small possibility in itself it seems odd to be worrying over this scenario right now. But all you do is alert the executor of his estate, and they'll figure it out. And if that's you, then you contact the financial group directly, have them do the RMD and put it in a holding account, and that is if his accounts don't already have an automatic distribution schedule (which will happen on the date he designated even if he died). All financial groups that work with IRAs are very aware of RMDs and what needs to be done and can tell you exactly what to do to get things done on time.

I loved my dad very much and losing him was just awful, and he did die in the month of December, but we were able to drag ourselves to make funeral arrangements and make many, many phone calls to get things in motion in the days after his death. You do what you have to do.

[Tenlha]

I'm saying this in the nicest possible way tho: Unless your dad is in hospice or something right now and going to die soon (in which case, I'm very sorry), worrying him about taxes and RMD timing right now - not for his sake but because you want to streamline things for your own inheritance - is morbid and a little disturbing.

You'll know this stuff now in the back of your mind and can deal with it when it happens. The only reason the RMD timing would be any kind of an issue is if your dad dies before taking his RMD and it is right at the end of the year - which is just such a small possibility in itself it seems odd to be worrying over this scenario right now. But all you do is alert the executor of his estate, and they'll figure it out. And if that's you, then you contact the financial group directly, have them do the RMD and put it in a holding account, and that is if his accounts don't already have an automatic distribution schedule (which will happen on the date he designated even if he died). All financial groups that work with IRAs are very aware of RMDs and what needs to be done and can tell you exactly what to do to get things done on time.

He's perfectly fine with discussing this and doesn't see it as morbid. Everyone dies, might as well plan for it. Especially since I have to be responsible for three other people who are named beneficiaries.

[Tenlha]

Read this, over, and over, and over, and over. and...

https://www.irs.gov/publications/p590b/ch01.html

This is exactly what I need. Thanks!