Inherited an IRA
L1: Inherited an IRAI am 53 years old and my husband passed away earlier this year. He left me as the beneficiary of an IRA with $200K. Now I have to make a decision on what to do with it. I’ve been given 4 options: Inherit to my own IRA, Life Expectancy Distribution, Five-year Rule Distribution, and Redeem All Assets Immediately.
I know the best thing for the future would be to roll it into my own IRA. However, with his passing, I am a bit strapped for cash, so I’m thinking of taking the Life Expectancy Distribution. Since I will be 54 when the payments would begin, it seems to coincide nicely with the 5 year or 59 1/2 year old rule, if my understanding of it is correct.
Does this seem like a good idea? Are there any pitfalls that I’m overlooking?
2012-03-20 22:25, By: vashi, IP: [220.127.116.11]
L2: Inherited an IRASorry to hear of your loss.
You didn’t give any ages, but if your husband was less than 70.5 you may be eligible totake the life expectancy option and delay actual distributions until the later of the year your husband would have been 70.5, or the year after your husband’s death.
At a later time (after you are over age 59.5) you can rollover to your own IRA. Any distributions taken prior to that rollover would be considered death benefits and would not be subject to the 10% penalty tax.
Take a look athttp://72t.net/Articles/ArticleShow.aspx?WA=23792755-4f32-4c9e-aca3-9736ce4943be- it is old, but I believe taht it is still accurate.2012-03-20 23:04, By: Gfw, IP: [18.104.22.168]
L3: Inherited an IRAMy husband was my age, 53, and had not begun taking distributions. I’m just trying to find a way to get the cash I need now without destroying the nest egg. I’m wondering if this is a good way to do that.
I keep reading about these busted 72ts and they seem very fragile…like one false step and KABAM! Uncle Sam wallops you. On the other hand, the money sitting in the IRA does me a fat lot of good right now, which is when I need it.
2012-03-20 23:20, By: vashi, IP: [22.214.171.124]
L4: Inherited an IRAPlease re-read my previous reply. If done right, there is no need to do a SEPP and any distributions would not incurr a 10% penalty as that would be considered death benefits.2012-03-20 23:35, By: Gfw, IP: [126.96.36.199]
L5: Inherited an IRAThanks for your help.2012-03-20 23:56, By: vashi, IP: [188.8.131.52]
L6: Inherited an IRABE VERY CAREFUL in how you proceed.
The proper approach is to do a trustee-to-trustee transfer from your husband’s IRA into an ” JOHN DOE,INHERITED IRA FBO JANE DOE”.
You can take distributions in any amount in any year, subject to income taxes, but not subject to the 10% penalty — SO LONG AS YOU DO NOT ROLL THIS INTO YOUR OWN IRA. If you do roll it into your own IRA, you lose this flexibility, and will be subject to the 10% penalty on all distributions before you are 59 1/2.
Starting in the year after his death, you calculate the REQUIRED MINIMUM DISTRIBUTION for an INHERITED IRA (you can take more), based upon the divisor per the applicable IRA table. Then, each year thereafter you calculate the Required MINIMUM Distribution by subtracting 1.0 from the factor determined above from that table. You do NOT USE the traditional IRA RMD table.
This will give you the “early distribution” help that you are looking for, without the restrictions of a SEPP 72-T, and complete upward flexibility of the amount to take each year.2012-03-21 04:00, By: dlzallestaxes, IP: [184.108.40.206]
L7: Inherited an IRAI agree that you should retitle the account as an inherited IRA, but you do not have to take any RMDs for 17 years because your husband would not have reached 70.5 until then and you are the sole beneficiary. The various things to do:
1) Supply copy of the death Cert and have the IRA re titled with you as beneficiary (NOT as owner)
2) Name your own successor beneficiary
With this format, you can take out as little or as much as you want and it will be penalty free as a death benefit. You also inherit any basis in this IRA if there was prior non deductible contributions. Check your older tax returns for Form 8606 showing basis. All you need to find is the last one and it will show how much basis remains. This basis, if any, will be distributed tax free pro rated with the pre tax amount.
Do NOT set up a SEPP, as you do not need one because the penalty is already waived.
Once you reach 59.5 you should roll this over to an IRA in your own name. After that you will still have no RMDs until you reach 70.5, and distributions will still be penalty free.2012-03-21 22:01, By: Alan S, IP: [220.127.116.11]
L8: Inherited an IRAAlan — I think that you have confused the issue. I think that you meant to say that if she rolls over his IRA into hers, then she CANNOT take any distributions before SHE reaches 59.5 without incurring the 10% penalty.
She indicated that she wanted/needed some money now.
You further complicated things by mentioning the INHERITED IRA and then saying she did not have to take her RMD for 17 years when her husband would have been 70.5
INHERITED IRAs require distributions to start the year after the year of death, and use the specially calculated factor, which is reduced by 1.0 each year thereafter, rather than from the table after the first year.2012-03-21 22:47, By: dlzallestaxes, IP: [18.104.22.168]
L9: Inherited an IRADlz… I have to agree with Alan on the last point.
A spouse who inherits an IRA from her spouse does not need to take any distributions from that inherited IRA until the later of the year the deceased spouse would have attained age 70.5; or if later the year following the year of death.
This rule only applies to the spouse. Any other beneficiary would have to start distributions as you indicate. 2012-03-21 23:03, By: Gfw, IP: [22.214.171.124]
L10: Inherited an IRAYes, and on the RMD issue gfw stated this in an earlier post as well.
Also, I don’t see anything in my post to suggest rolling this over to her own IRA until she reaches 59.5. After that she can still take distributions without a penalty, but does not HAVE to take any RMDsuntil 70.5 (or required beginning date of 4/1 of the following year at the latest).
Since she does not have to take RMDs, there is no harm done either just leaving the IRA as inherited until she reaches 70.5, but there are negatives if she forgets at that time, so it is better to roll it over at 59.5 in her case to get the rollover behind her.
2012-03-21 23:20, By: Alan S, IP: [126.96.36.199]
L11: Inherited an IRAOne thing I learned from reading this site is that Alan S. knows his stuff on IRA’s and beyond better than almost everyone else. KEN2012-03-22 03:11, By: Ken, IP: [188.8.131.52]
L12: Inherited an IRAI realize that I’m “late to the party” replying to this post, but I was involved in tax season and am just now playing “catch up” on posts.
GFW and Alan S are absolutely correct about the inherited IRA situation. A spouse, after re-titling her husband’s IRAas an inherited / beneficiary IRA (one in the same) can take any amount of distribution dollars before her age 59.5 and her only liability is ordinary income taxes on the taxable distribution amount.
NON-SPOUSE beneficiaries must begin the RMD’s regardless of their age but, like the spouse, death distributions from an IRA … and any distribution from an inherited IRA qualifies … are not subject to the 10% early withdrawal penalty.
The unfortunate part of my profession as a financial planner is dealing with this situation when a client dies, and I have lost more than I would have liked. But, that’s part of life.
Jim F2012-05-22 19:46, By: Jim F, IP: [184.108.40.206]