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Author: KLTolly One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121599  
Subject: Decedant IRA Date: 11/23/2008 11:53 PM
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I am executrix of the estate, as well as one of 3 beneficiaries on my Mom's IRA. Mom passed away earlier this year; when my father died last year, she assumed his IRA as her own. Both were already well into receiving annual required minimum distributions due to their ages.

The account is held in an IRA CD with a local bank. The manager of the bank is telling me that I need to roll the funds into 3 IRAs, one in each beneficiary's name, as we can assume the IRA proceeds as our own. No other options have come to mind, as far as he is concerned. (I do realize that the bank is looking to preserve any deposits they can.)

If we do this, it appears (from the IRS website) that we must maintain minimum distributions annually. None of us is near 59 1/2 years old (the youngest is 39), so I am curious as to how this will work. Would we pay a penalty for withdrawing prior to reaching age 59 1/2, in addition to declaring the distributions as taxable income? If we opt to just redeem the IRA and distribute 3 ways, are there tax implications?

TIA

KLTolly
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 102707 of 121599
Subject: Re: Decedant IRA Date: 11/24/2008 12:46 AM
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The manager of the bank is telling me that I need to roll the funds into 3 IRAs, one in each beneficiary's name, as we can assume the IRA proceeds as our own.

Kinda, sorta, not really. What you can do is roll it into three "inherited" IRA's. It's not the same as it was when your mother just rolled your father's IRA into hers. That option is available only to spouses. Nomenclature varies, but make sure it's clearly labeled as inherited rather than "just yours."

No other options have come to mind, as far as he is concerned. (I do realize that the bank is looking to preserve any deposits they can.)

There are other options, but regardless of his motives he's suggesting the best one. It gives each beneficiary maximum flexibility at no cost. You can roll an inherited IRA to a different custodian just like you can roll your own.

If we do this, it appears (from the IRS website) that we must maintain minimum distributions annually. None of us is near 59 1/2 years old (the youngest is 39), so I am curious as to how this will work.

It works the same as it would if you were older, only your life expectancy is longer so the required distribution is a smaller percentage.

Would we pay a penalty for withdrawing prior to reaching age 59 1/2, in addition to declaring the distributions as taxable income?

No. Inherited distributions are exempt from the premature distribution penalty.

If we opt to just redeem the IRA and distribute 3 ways, are there tax implications?

All the money would be taxable at once rather than being spread out over quite a few years. If one of the heirs wants the money now there's nothing to prevent cashing out that share once it's been split. The required distribution is a minimum, not a maximum.

Phil

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 102712 of 121599
Subject: Re: Decedant IRA Date: 11/24/2008 12:56 PM
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... The manager of the bank is telling me that I need to roll the funds into 3 IRAs, one in each beneficiary's name, as we can assume the IRA proceeds as our own. No other options have come to mind, as far as he is concerned. (I do realize that the bank is looking to preserve any deposits they can.)..

It sounds like they are being straight with you as to what is best.

Once the IRA is split into three inherited IRA then each of the three new owners can have their inherited IRA transferred wherever they want(like Fidelity or Vanguard or whoever). There may be a small transfer fee of about 50 to 75 dollars but this is normal.

Once the IRA is split, then each year the value on January 1st will be used to calculate the required minimum distribution. Most IRA companies will be able to set this up to be done automatically so that you don’t forget and they will calculate how much needs to be transferred. It is convenient to have a taxable account with the same company so the money can just automatically be transferred into the taxable account each year. If you don’t do the required distribution the taxes and penalties are punitively high, you do not want to miss a required distribution.

The distributions from the inherited IRA will be taxable income and if it is a large amount then it would be a good idea to file estimated taxes so that there is not a penalty for not withholding enough. If the person is eligible for an IRA or a 401K, then they can make an equivalent contribution to the IRA or 401K to get a tax deduction to cancel out the distribution so they wouldn’t have to pay more taxes.

Greg

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Author: KLTolly One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 102765 of 121599
Subject: Re: Decedant IRA Date: 12/1/2008 12:14 AM
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Greg and Phil-

Thank you both for the clarification. Two of the beneficiaries are on opposite sides of the issue (one wants all monies NOW, the other is a long-term planning kind of guy) with me, the middle child, as usual, caught in the middle.

It seems that we can all get together, split the IRA into 3 inherited IRAs, then basically do as we each please with our own account going forward.

One last issue - we will each have to name beneficiaries on our inherited IRAs - will this work the same way for our beneficiaries, or is there a limit as to how far an inherited IRA can stretch?

Thanks again!

Tina

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 102767 of 121599
Subject: Re: Decedant IRA Date: 12/1/2008 1:37 AM
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It seems that we can all get together, split the IRA into 3 inherited IRAs, then basically do as we each please with our own account going forward.

Right, with the restrictions imposed on all non-spousal inherited IRAs, e.g., RMD's regardless of age.

One last issue - we will each have to name beneficiaries on our inherited IRAs - will this work the same way for our beneficiaries, or is there a limit as to how far an inherited IRA can stretch?

AFAIK, no. In fact, it's sometimes referred to as the "stretch" provision.

Phil

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