Sep 15

Some time back, I wrote a post called “On My Death, Please Take a Breath” about how one should wait before doing anything in haste financially after the passing of a loved one. I paid specific attention to the inheriting of an IRA, and received some feedback prompting a longer discussion.

First, there are different rules if you inherited the IRA from a spouse or non-spouse. If your spouse passed and left you an IRA, you are able to roll it into your own account, and treat it as your own.

If you inherited the IRA from a parent (for example) or other non-spouse, the rules are a bit tricky, but not impossible, to understand. The IRA becomes retitled as JoeTaxpayer, beneficiary, Charles Schwab Custodian. It’s most important to note, the funds can NOT be mingled with any other funds you have. You must begin taking withdrawals by December 31 of the year following the person’s death, and you use the life expectancy table 1 in Appendix C of IRS Publication 590 to determine your required distributions. Note also, you refer to this table once only, for the initial distribution. In subsequent years, you reduce the divisor by 1, unlike withdrawals from your own IRA after 70-1/2 where you refer to the table each year to find your new withdrawal requirement.

Another important point – If the original IRA had contingent beneficiaries, you may disclaim your inheritance and allow the next in line to inherit the IRA. Why would you do this? If you are a high earner, in a high tax bracket, you may not need the money at all, or if the next person listed as beneficiary is your child, their RMDs (required minimum distributions) may be so small, they avoid tax, or are minimally taxed.

While on the topic of contingent beneficiaries, an IRA must have its beneficiaries noted on the account, they are not inherited through a will. If there is no beneficiary listed on the account or if the only beneficiary either pre-deceases or dies along with the account owner, the IRA funds must be withdrawn by the heirs within five years of the passing of the owner. Note, in your will you can include instructions to your beneficiaries not to withdraw the funds (i.e. not to ‘cash out’ the account 100%, but only take RMDs, this is a note you’d include, it’s not binding) in the IRA after your passing.  This is the worst decision they can make. If they are afraid of the stock market, or don’t understand the investments you left them, they should simply change its contents to Treasury bonds or CDs.

Lastly, this is a complicated topic, it’s easy for even the so-called pros to make an error. Read up to understand the rules, and ask questions before you make a tragic mistake and are hit with a huge tax bill. A final note, I mention nothing about converting your inherited IRA to a Roth IRA. This is not allowed for a non-spouse beneficiary, and for a spouse, only if they put the IRA into their own name first.

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183 Responses to “Inheriting or Bequeathing an IRA”

  1. Britt G Says:

    Interesting post. It can be a nightmare for an average person to figure out the implications of an inherited IRA, especially if you have multiple non-spouse beneficiaries, such as children.

    I like the motto of keep it simple… So I’d advise closing out/cashing out as soon as possible, assuming it makes financial sense to do so. Otherwise, precious life is wasted trying to figure out the IRS rules.

  2. JOE Says:

    You may wish to re-read my Take a Breath article, cashing out is exactly the wrong thing to do…..


  3. Turn Says:

    Good article. I lived through this situation. My mother died and left an IRA for the children. Once the paperwork was completed, the IRA was split into 5 parts for the 5 children. Then each child was able to decide for themselves if they would cash out or whatever. I did take about 1/3 of it out to help cover estate expenses and some other things BUT I paid about 50% of that 1/3 in taxes. You will pay state and Federal taxes and need to check how much it is in your state. Some states are outrageous. Take the time to read up on this – become knowledgeable on the subject and don’t take advice from just one financial advisor – try many. With the advisors help, I was able to determine how much to take out without panicing due to the poor economy. Make sure you set aside at least 50% of the $ for tax and don’t forget about the yearly withdrawals. There are online charts to check for that amount.

  4. JOE Says:

    I’m sorry for your loss. It’s especially tough when there are no assets outside the pretax accounts to cover final expenses. Ideally, the beneficiaries are only subject to the small annual withdrawals.

  5. Top 135+ Personal Finance Posts for 2009 (That can be used 2010 and beyond) Says:

    […] Inheriting or Bequeathing an IRA explaining the rules to properly handle the details of the IRA before and after one passes […]

  6. Karen Says:

    Thank you for your easy-to-comprehend advice! I’m new to the IRA bequeathing issue. I was shocked to learn how impossible it is to leave these accounts to my blood offspring. May I ask?

    My living Father transferred to me, at this very late juncture in life, two investment accounts that he’d opened when I was a child. I’m now 60. I want to protect those accounts from inheritance by my husband or his family; and to preserve them for my own natural born grandsons. Clearly my husband has no vested interest in the accounts. I’ve learned that cannot name a Transfer On Death beneficiary without my husband’s sign-off and that just is not practical.

    What can I do to most effectively and efficiently bequeath these accounts to my own blood offspring?

  7. JOE Says:

    Is this an IRA you’re asking about? I don’t believe you need anyone’s permission to change your own beneficiary on these, is your broker saying otherwise?

  8. Karen Says:

    They are two investment accounts my Father started years ago. Their TOD forms have a section for the spouse to sign-off my beneficiary desgination if it’s anyone other than him. The forms read that this spousal sign-off is mandatory or, regardless of my designation, at my death the spouse inherits 50% anyway; and the remaining 50% is set-aside for that process.

    From reading the firms’ TOD forms, I assumed these were IRAs or 401k(s). My Father has since said they are not “retirement” accounts, but they are personal investment accounts in stock market funds. There’s a bit of a process to name a new TOD and I want to be sure it’s done right.

    Thanks for your reply!

  9. JOE Says:

    No problem, good luck Karen. The only account I’ve ever seen that needs a spouse sign off is a pension, surprised that this has such a restriction.

  10. WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’ | Tax Identification Number Says:

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  11. CJ Briggs Says:

    I am facing this situation right now. Is it worth all the trouble (to do something other than a full payout) if the IRA is relatively small? I am talking about $77k split between 4 beneficiaries (all children of the deceased).

  12. JOE Says:

    The effort is minimal, paperwork to the broker holding the IRA. Even $20K in the account can grow over time if the beneficiary only withdraws the required minimum each year. A shame to have it withdrawn and taxable all this year.

  13. Duna Says:

    Question: If my granddaughter is 12 in 2011…and she is the receipient of my IRA …how does she withdraw the required minimum distribution and how does she pay the taxes on the amount she withdraws. Can she be allowed to keep it in the original investment…until she needs it for college? She is too young to file a tax return….how does this work?

  14. JOE Says:

    Ok, first you look at publication 590 and see that at age 12, she has a divisor of 70.8. You then take the IRA balance at 2011 year end, say, it’s $100,000. 100000/70.8 = $1412.43. This is her RMD for 2012. She is not ‘too young’ to file a return, I think my child’s first return was when she was 2. Keep in mind, there is a kiddie tax exemption, so the child gets $950 with no tax at all, and the next $950 at 10%. In my example, about $46.
    Yes, the parent can just add to their return, but that would be at their rate, not a good idea. Last, the withdrawal can be “in-kind” which means it can be made in the form of the stock or fund within the IRA. If it’s a stock, it’s OK to go over a bit, e.g. round up to the nearest whole share, and pay the small tax due. Remember the RMD is the minimum required, more is ok. Next year, you do not refer to the chart, her divisor goes down by one each year.
    How you manage it once it’s out of the IRA is up to you, but one way is to set it aside in her name, and when she’s working, use it to help her fund a Roth IRA, but that’s another subject.

  15. nann Says:

    what if you are over 57 when you inherit the ira do you still get taxed on the portion you inherit and withdraw?

  16. JOE Says:

    Yes, regardless of age, if the IRA is all pretax money, it’s all taxed at withdrawal. Of course, this is at one’s marginal rate, so a child may pay little to no tax at all, and if one is in a low bracket, they might stay in that bracket by just taking out the RMD (required minimum distribution)

  17. Anne Says:

    My Mom passed away in December 2011. Her wishes in her Will were for her assets to be divided equally between myself and my 2 sisters. At some point my Mom listed me as beneficiary of her traditional IRA. The custodian has refused to abide by the instructions in the Will as the beneficiary form supersedes the Will. This is in the state of Tennessee. Is there a way to get the balance of the IRA divided 3 ways without cashing it in for a lump sum payout. We all would like to stretch out the payout. If I choose to disclaim a portion of the balance would it go to my Mom’s estate and enable my other 2 sisters to receive their portion? The tax attorney says to talk to the CPA, and the CPA says to talk to the tax attorney….The amount is around $170,000, so the taxes would be substantial on a payout. Any guidance would be appreciated.

  18. JOE Says:

    If you are the listed beneficiary, and there is no other, by disclaiming the money, it would revert to her estate. The five year rule then applies, all funds must be depleted within 5 years after the owner’s passing. I can’t say whether the custodian will permit a partial disclaiming.

    If it were me – I’d take the RMDs each year, pay the tax, and gift the siblings their “share.” You can view Pub 590 to see your RMD, but for example, at 50, the divisor to use is 34.2, so 170,000/34.2 is $4971. You can withdraw more if you wish, but be mindful of where you are in your marginal rate.

    For legal purposes, you owe the siblings nothing, and the will’s executor would give you one third of the estate ignoring the IRA money. This should serve as a warning for any reader who has beneficiaries listed on their IRA, but has a different split in their will.
    I hope this helps.

  19. Anne Says:

    If I disclaim the entire amount and the money is moved to the estate, would I still be eligible to receive my 1/3 of the funds? Also how would the withdrawals be handled? Would we still set up the “inherited IRA’s” accounts? Some of the reading that I have done danced around the answer to that question, sounding like if I disclaimed it, I would not be entitled to any funds from the IRA.

  20. JOE Says:

    When you inherit an IRA through proper beneficiary forms on file, you keep the titling as “JoeTaxpayer Sr, Deceased, for benefit of JoeTaxpayer Junior.” Once it’s inherited otherwise, through a will, the stretch option is broken, and the five year rule kicks in.

    All my reference material explains the right way to have set up the beneficiaries pre-passing, or the actions post-passing either with or without the beneficiary forms. I find nothing that would spell out a plan to address your combination of events and goal. That said, I’d spend time with the custodian of the IRA, and try to better understand what the custodian believes the options are. Since you are in control, propose to the custodian that the IRA in your mom’s name still, is split 3 ways into 3 accounts, beneficiary form in tact. Then disclaim the inheritance on two of the three accounts. They may refuse this, but I believe it passes proper procedure.

    By the way, the five year rule isn’t so bad. Divided by 3, the $170K is just under $57K each, and by taking just over $11K per year, the taxes would be minimized. If you are not using a 401(k) and IRA to the maximum deposits each year and have earned income, you can just increase deposits to absorb some of this money each year.

  21. Anne Says:

    Thank you so much for your time. I will contact the custodian so we can discuss the options. I enjoy your website.

  22. JOE Says:

    Thanks for your kind words! The tax code is complex, but I actually enjoy keeping up with it and helping people. The topic of IRAs and inherited IRAs is particularly tough, easily stumping the experts. Let us know how the custodian responds to all this. Be well.

  23. Jeff B Says:

    I want to disclaim my 50% share of my widowed mother’s IRA and have my half go to my 2 children (my sister is the other 50% beneficiary). Rather then wait until after my mother passes to disclaim my interest, can I just have my mother now sign an updated IRA beneficiary form stating my 2 children as the primary beneficiaries of my 50% interest?

  24. JOE Says:

    Jeff – Thank you for writing in. To be clear – Disclaiming your share at your mom’s death would give all of it to your sister as it stands now. So, yes, absolutely, approach mom and ask her to update the beneficiaries form, 50% sis, 25% child 1, 25% child 2. After mom passes, there would still be the matter of properly splitting the IRA into 3 accounts. If you are helping her with her money, I suggest doing this now, 50/25/25, and use the RMDs each year to even out the account balances if they are invested differently.

    As far as I’m concerned, each transaction is a chance for a mistake to break the IRA. Doing this in advance will help avoid future mistakes. Each account should have contingent beneficiaries as well. Let me know if this fully addressed your concerns.

  25. Jeff Bovit Says:

    Thank you for your help.

  26. nancy Says:

    Could you explain some of the complications of leaving an IRA to a spouse and children. I understand you would still split the IRA into separate accounts but are there any other complications? This is a second marriage and my husband would like to leave some to me and some to his children. He was also thinking of grandchildren who are minors.
    If part of the IRA is left to grandchildren there would have to be custodians correct? Could the custodians withdrawal the money lump sum for the grandchildren without restriction?

  27. JOE Says:

    The one thing about the spouse as beneficiary which is unique (to spouse only) is that the spouse can re-title into her own name, and if she in under 70-1/2, no RMDs are due. When leaving an IRA to any non-spouse, the beneficiary must be sure the custodian titles the account properly – “JoeTaxpayer IRA (deceased 1/1/2010) F/B/O JoeTaxpayer Jr, Beneficiary.” In this case, if Joe Jr simply retitles to his own name, the IRA is broken and the five year rule kicks in, the ability to stretch RMDs over his life is lost.
    Thinking the Will is how an IRA is inherited is one of the other issues. It’s important the IRA itself reflect the chain of beneficiaries desired. If the IRA has no beneficiary designation or the beneficiaries have predeceased the owner, the IRA passes via the Will and Estate, and again, the lifetime RMD opportunity is lost, 5 year rule kicks in. Other issues come into play when the beneficiary is an ex-spouse the deceased forgot to remove from the forms. I hope this helped.

    For your husband’s IRA – I suggest he first split the IRA into at least two accounts. One account to reflect the amount he wishes to leave you. If you have no heirs, he can put his kids as contingent beneficiaries. (When creating the chain of beneficiaries, it’s important to consider the chance, however slim, that people can perish in the same accident.) For the other funds, he can split as he wishes, but I’d be sure he includes contingent beneficiaries on that account as well. A child’s IRA has to have a guardian/custodian. Yes, funds can be withdrawn “for the benefit of the child.” If I ran a brokerage firm, I’d offer a free choice – An account with a low expense index fund, and RMDs automatically disbursed, but no additional funds regardless of circumstance. There are ways of doing just this via a trust, but this can get pretty expensive both to set up and maintain each year if a third party is used as trustee.

  28. Julia Says:

    My mother passed away in April of 2002. In her IRA she named me and my brother as beneficiaries. I have yet to take possession of the IRA. I have spoken to the Custodian and they ask me if she was taking minimum withdrawls and asked me to contact the IRS to find out, since I don’t know if she did or not. I believe, they should have that in their records and just let me know. So, what are the consequences to have not taken possession within five years of her passing?

  29. JOE Says:

    If done properly, you should have taken RMDs each year as beneficiary. There is a 50% penalty for RMDs not taken. Publication 590 shows the RMD requirements in Table 1. If you are in your 40’s it’s less than 3% per year, so to catch up, you need to do the math, and request a waiver of penalty, or pay 50% of the withdrawn amount.

    You didn’t have to withdraw the account in 5 years, you should have been able to take RMDs the rest of your life.

  30. Cindy Says:

    Hi Joe,

    My mother passed away last month, leaving about $270K in a rollover IRA. She was 68, so I don’t think she had started taking distributions, but I’m not sure. She had other assets, but the IRA was the largest asset by far. I have two sisters, but only one sister and myself were named as beneficiaries of the IRA. Her will stated that her assets be divided as follows:
    25% to each daughter
    Remaining 25% divided between 7 (minor) grandchildren

    I am one of the co-executors of the estate, along with the sister who was NOT a beneficiary. The three of us agree that the IRA money should be divided according to our mother’s wishes in her will. We were going to do this by taking a lump sum and then gifting the appropriate amount to our sister and all the grandchildren. That would be a big tax hit for the two of us who are beneficiaries, and it doesn’t seem like the best route. Would maybe disclaiming a portion of the IRA be a better way to go? I don’t know if there are any contingent beneficiaries.

    Many thanks for your help!

  31. JOE Says:

    First, I am sorry for your loss.
    It’s tough to try to ‘fix’ things after the fact. First, and most important, you need to find out if the IRA had contingent beneficiaries listed. If so, and if the broker is ok with partial disclaimers, you might get closer to your goal.

    If not, IRAs that are inherited via will instead of named beneficiaries do not enjoy the opportunity for lifetime payouts. The payout (withdrawal) has to occur within 5 years. So this would mitigate the tax hit. If both listed beneficiaries disclaimed, and let the will take over, 3 daughters each get $67,500, and by taking $13K or so per year, the taxes won’t be so bad. The 7 grandkids each get less than $10K, so $2K per year.

    Alternately, the two proper beneficiaries can take the IRA, properly split it, and title it as a beneficiary IRA, and take the new RMDs over her lifetime. They can both deal with this small withdrawal and share it each year with those they feel should have inherited the money. The required distribution in one’s 40s is just over 2% of the IRA’s value, so less than $6,000 from the account to divide.

    This is a tough situation, one message I try to get out there is that 401(k), Pensions, and IRAs all pass outside of the will. A beneficiary can go to the broker with proper ID and the death certificate and the funds will be accessible. The will executor(s) do not need to be notified at all. So an estranged child or former spouse, aware of such an account can take what was originally due to them regardless of any present will.

  32. Kay Says:

    Dear Joe, very informative article and responses to queries – thank you! One other query, my brother and I are named as beneficiaries in our now deceased Mother’s IRA (all pretax contributions) from which she as receiving RMD. Would the 15% early withdrawal penalty (in addition to ordinary income tax for Federal and State) purposes apply if we elect the cash out method (vs transfer to inherited IRA)? Also, the IRA was established in NYS and we live in CT, so I believe the applicable state tax is the residency state of the benediciary and not the domicile and residency (as well as earnings) state of the decedent – correct? Many thanks, Kay

  33. JOE Says:

    Sorry for your loss, Kay.
    The 10% early withdrawal penalty does not apply to inherited IRAs. I understand that you don’t want to take withdrawals over your lifetime, but I’d still suggest looking at your tax return to understand your marginal rate. It may make sense to split the withdrawals over a few years to avoid being pushed into a higher bracket. Last, I believe this lands only on a CT return, there’s no reporting back to NY.

  34. Kay Says:

    Thank you !!

  35. Warren Says:

    Joe, My father recently passed away and left his IRA to my brother and I to split. My brother is trying to take it all out to pay student loans and is wondering if this is not taxable for that reason or even if the taxes would be lower? I also have debts to pay off and would like to take out what i can to pay off my car note without paying more in taxes than i would in interest on the loan? Ive been reading up as much as i can but all the legal terminoligy gets mind boggling after a while. Would a tax professional from H&R Block be able to help me or should i just get it over with and cash out? Any advice would be much appreciated

    Thank you!

  36. JOE Says:

    I’m sorry for your loss.
    Assuming the money was in a Traditional IRA and not a Roth, it’s all taxable when withdrawn. As a beneficiary, there is no age requirement to avoid penalty. You both just have tax due at your marginal rate. Depending on the amount in question, I suggest you look at your income, the near last line of the 1040, taxable income. If you are nearing the top of the bracket you are in, it may make sense to split the withdrawal over a year or two. If you you are paying off some high interest debt, I have no objection to this plan, I’d just hate to see you take the full withdrawal this year, when a split into 2013 might keep you I your current bracket both years. I will edit my response to link to my article at whe I discuss marginal rates. Happy to answer a follow on question if this still isn’t clear.

  37. Laurie Says:

    Hi Joe:

    Thanks for the great article. Two questions:

    1. In one paragraph you noted that a beneficiary who inherits an IRA from a non-spouse must take the RMD’s.
    2. In another paragraph you noted that a will can include instructions to your beneficiaries not to withdraw the funds in the IRA after your passing

    These to statements seem to be conflicting. Please advise…thank you

  38. JOE Says:

    Hi Laurie, I edited just now to try to clarify. The note in the will is to be used to explain the RMD process to the beneficiary, and suggest they not pull withdrawal the entire account balance and avoid the error made by the man in the article On My Death, Please Take a Breath. The beneficiary has the option to take what he wishes each year, the RMD is a minimum, not maximum. The note in the will is just a suggestion, enforcement takes a more complex process involving a trust.

  39. Cheryl Winget Says:

    My sister passed 1 1/2 ago and has left my mother with 2 IRA’s both are list my mother as the benefiary. She passed suddently and unexpectantly and had no valid will that we were able to locate, therefore, leaving my nephew Ryan (her only son) as the beneficary to the estate……We were able to obtain the first IRA in my mother’s name without any problem, however, we seem to be getting the complete and utter run around with cashing in the 2nd thru Matthews Asia IRA company……we have jumped thru and submitted all of the requested paperwork but they still are wanting an original form of the Tennessee Inheritance Tax Closing Letter. This is where we are running into the road block, because her son being the executor has fallen off the face of the Earth and cannot be tracked down to obtain this form thru, the probate lawyer that her son used/went thru …….retired and left no forwarding information. So can you suggest where we go next? We have already spoken with the Tennessee Department of Revenue and they told us that we need to either go thru her son or patician the court to become executor, but in order to do this we would have to travel to Tennesssee! Please Help! Thank you!

  40. JOE Says:

    I’m sorry for your loss. When something is outside of my expertise, I’ll be quick to admit it.
    I know a lot about IRAs and how to title them for inheritance. When done wrong, or not at all, they are subject to probate as is any asset of the estate. I’m not familiar with the rules and details of probate, only how to avoid it, as it creates a headache as you’ve discovered. Sorry I couldn’t be of more help to you.

  41. Brian Says:

    One quick question if you don’t mind. I am the executor of my uncle’s estate,(uncle Jesse) It was going to be real simple till I got a call from an executor of my other uncle’s estate. (uncle Buford). Uncle Buford had list as beneificiary on an IRA Uncle Jesse. Uncle Buford passed away 1st. and I found out about this the week after Uncle Jesse passed away. So what do I need to do, the Bank says that I need a letter of testimentary to verify that I am the executor. (I had power of attorney prior to my uncles passing and I am listed in the will as the executor why should I have to petition the court for this letter? Anyway they say they need the letter and copy of the death cert. then they will release the IRA to the estate. The will states that myself and my cousin are to share equal portions of all monies left in any accounts. Is this the best way to handle this and let the estate pay the taxes on the IRA. since my deceased uncle was 91 yrs old. Thanks

  42. Gonzalez Says:

    Re: retirement insurance annuity beneficiary changed-help needed

    Since 2000, I was listed as the sole beneficiary on blood relative annunity.
    Lady buddies up to him and 5 moths later he dies from cancer of liver while she is caring for him. I open envelope to follow his wishes, and call annuity company to learn my name was replaced 11 days prior with help from a 3rd party who also had my relative write a will same day to give the home, etc also to lady. She took care of relative for 2 whole days and he gave her almost 1 million seems highly unlikely! He became very ill those 2 days. Doc says they were waiting for my call while she told folks she was not calling me and she did not call until he was comatose. She had all my numbers and emails. I also learn 4 mos prior relative adds this same lady’s name to policy again with the help of this 3rd party who was just being nice. That time they left my name. I filed disputed day of finding which is also day of death. I also sent yesterday medical reports showing man was very ill the day he is suppose to have signed papers and will! He was falling all over room, I’ve in arm, disoriented, very out of it mentally. I am not sure of next step? Will they contact me? The ins com implied that the change of bene was not complete so then I think it would revert back to me, right? Relative also wrote will that day saying all accts at annuity bank go to this caretaker. coincidence she was kick out of her mothers trust for 1mil in jan 2012 and started working my relative in April 2012. Thoughts suggestions?…..thank you.

  43. Carl Says:

    My wife is in the process of rolling over an inherited IRA that she was the beneficiary for from her father. Is there any way that she can turn it into a Stretch IRA for our kids instead of herself?

  44. Elin Dillner Says:

    Joe, Thank you for your article and info. My mother died on Oct. 11 of this year at age 90, leaving my brother and me co-beneficiaries of an IRA of $13,000. I have not brought the death certificate to the custodian/ bank yet because I want to be sure I handle this the best way. The bank is scheduled to send her annual minimum distribution in early December. Question 1: Can I simply wait to present the death certificate, allow the check to come in her name, deposit into her checking account and include it as income on her 2011 tax returns? The bank rep I spoke with the other day said this was OK, but is this legal/ kosher?

    Question 2: Since the IRA is a relatively small amount, my brother & I are not interested in maintaining inherited IRA accounts. The IRA is in a CD earning 4.25% that matures in March 2013. Can I just present the death certificate to the bank at that time, and divide and cash it out then? We understand it will be taxed as regular income on our 2012 tax returns. Thank you for any help with this!

  45. JOE Says:

    If the kids were listed as contingent beneficiaries, she can disclaim her share and let it go to them. If they weren’t on the IRA beneficiary form, the opportunity for them to inherit and stretch isn’t available.

  46. JOE Says:

    I am so sorry to read this situation. This is a legal matter, not a tax issue. I’d be out of my league to try to give advice on this issue.

  47. JOE Says:

    If a required distribution was due this year, it should be taken out in your uncle’s name. Whatever is left should be distributed to you and the cousin. You would pay the tax on the amount you withdraw each year. You can either take withdrawals over your uncles life expectancy if he was taking RMDs or over 5 years to keep the taxes low.

  48. JOE Says:

    1 – yes the RMD for 2011 is taken in 2012 as income on her return.
    2 – for such a small amount, I agree, just cash it out when the CD matures. The bank should first split the funds in half, putting the money in beneficiary IRAs in each of your names and then let you withdraw under your own social security numbers.

    I am sorry for your loss.

  49. Eileen Says:

    My Mom, who recently passed and was over the age of 70-1/2, had a traditional IRA naming myself and 2 siblings as beneficiaries. I understand we have to take the minimum distribution, but after that, can we take out more money for her expenses before it is split between the 3 of us?

  50. Cindy B Says:

    My Mom passed in April 2012. I am the executor of the will. I have three siblings (so 4 total). One IRA with a bank had all 4 of us as beneficiaries, so that was easy. I just discovered 3 other IRAs with a different bank. Here’s the issues.

    One IRA account has the beneficiary as my dad (who is deceased). I assume I can close that with my probate papers as it would go to the estate.

    One has two siblings name on it, while another account has just one sibling’s name on it.

    The siblings with their names as beneficiaries want the IRA’s to be split 4 ways. Is there a way the named beneficiaries can have these treated as if all 4 siblings were named? (ie can they add names?) Or is the only option cashing them out, paying the taxes and distributing the money that way?


  51. JOE Says:

    If there are living, named, beneficiaries, they are the only ones who can receive the inherited IRA and take distributions over their lifetime. If the named beneficiaries disclaim their inheritance, it then follows the will/estate, in which case, they may see the money distributed as they hoped, but it’s then part of the probate estate. IRAs inherited this way are withdrawn either over the RMD schedule of the deceased, if she was over 70-1/2 and started withdrawing RMDs, or within 5 years.
    The dollars involved would determine how much effort one should put into this. For example, if I were inheriting $20,000 in an IRA that I really felt should have been split with my sister, I’d keep the entire account as a beneficiary IRA, and give her a check for $7500, as 25% is my tax bracket.

    I hope this helps. And for my readers, an example of why the beneficiaries on all accounts should be reviewed each year.

  52. JOE Says:

    I’d suggest that after the RMD for your mom is made, the account be split in 3, properly titled for each of you and then separately chip in for the final expenses. This way, each sibling can choose whether to take only her minimum withdrawal for the first year, or take a larger withdrawal to be used for this purpose. Depending on how large this account was, I’d hope you can all let it grow as much as possible to help with your own retirements.

  53. Brian Says:

    Thanks for the reply, so let me get this straight my deceased Uncle Jesse was listed as the beneficary of his deceased brothers IRA (Uncle Buford) I am the executor of Uncle Jessies estate. Myself and a cousin are listed in uncle Jessie’s will as splitting any funds left in any accts. I am in the process of getting the letter of testimentary from the courts. what should I do with this IRA. The bank said it is normal for an estate account to be setup with an EIN # Since I can’t use Uncle Jessie’s SSN. and that the IRA would be moved to that and then ? Does the estate pay the taxes before it is split between me and my cousin? Its in excess of 80,000 or do we each treat it as income for this year and pay taxes. From what I’ve been reading I can’t role it over into a inherited IRA account since Uncle Jessie did not have either off us listed as beneficiary since he did not know he was even listed as the beneficary of his brother. If you require additional info please send me and email an I will get back ASAP Thank you again for your wonderful website.

  54. Jenny Says:

    My mother has IRA in the amount of $60,000 of which my sister and I are beneficiaries. We are ages 52 and 51. Under the current tax rules, my mother’s estate is below the amount that would incur an estate tax. Based on this, would it be beneficial for her to take a lump sum withdrawal of the IRAs so that they would be taxed at her tax bracket instead of at our tax bracket that is much higher?


  55. JOE Says:

    Absolutely not! If she’s in a low bracket and wants to help you, the better choice is for her to convert to a Roth IRA, either all at once, or over a few years, to not jump to the next bracket. This way, she can pay the tax at her lower rate, but keep the money in a retirement account so it can continue to grow. When she passes, you’ll each get 1/2 the account, and have RMDs each year, but with no tax due. You can always withdraw more than the RMD if you wish, or just take the minimum and see years of growth for the inherited account.

  56. Cliff Says:

    Can the funds in a 401-K IRA be left to a trust with two daughters and three grandchildren as beneficiaries with the trust receiving annual RMD and paying the tax and then making distribution as specified in the trust? We would not want the grandchildren to take any money until they are ready to use it for college. We also do not want their parents to take the money in one or even five payments. Can we get by with our existing trust, amended as necessary, or should we have a trust for each beneficiary?

  57. JOE Says:

    There are two parts to what you are attempting. 401(k) plans have their own rules, not all permit lifetime distributions to a beneficiary. I’d check with the custodian of the plan to verify what they allow. As for the IRAs – a properly set up trust is a pass-through entity, as a trust is not human, it has no life, and for purposes of the RMD, the beneficiaries’ age is used to do the calculation. If the trust is set up with 5 beneficiaries, it’s the oldest whose age determines the RMD. This may create far higher withdrawals than you want to generate which is why individual trusts might be preferable.

    But on to part two – I don’t believe it’s permissible for the RMDs to drop into another trust, the money must be distributed to the beneficiary. In the case of minor children, the parents are obligated to keep the money in an account for their benefit, a UGMA account for example. This should satisfy your intentions, but the funds are available to be used at the parent’s discretion once distributed from the IRA within the Trust.

    I hope that helps answer the question. It’s possible to accomplish your goals, but those surviving you need to be in agreement.

  58. Shelley Says:

    Hi Joe, I hope this is a simple question with a simple answer. My dad (age 92) passed away on April 15, 2012. His small IRA was split between my brother and myself (each of us received about $30K, so we’re talking a smallish amount.). I have established an “inherited IRA” account and plan to take it all out in early 2013 (my husband and I will be in a lower tax bracket in 2013 as he just retired from his job.) BUT the question is, do I still have to take an RMD for this year (2012) to keep the IRS happy? I’d rather not as we’re still in a high tax bracket, but if it will keep the IRS at bay, then I will take the RMD. I find conflicting advice on this question. Thanks and Happy New Year!

  59. JOE Says:

    Hi, Shelley.
    Sorry or your loss. If you take it all out within five years of his passing, there’s no penalty. In fact, I’ve seen the advice thatifone misses a few years of RMDs after inheriting, this strategy would negate the accumulating penalties.
    By the way, you don’t have an RMD for 2012, but your dad still had to take his before the funds were transferred to the inherited IRAs as he was over 70-1/2. This may have added to the conflicting advice you read.

  60. john Says:

    if someone has roth iras, can the beneficiary be set up as a trust to manage the roths and retain its tax free features for a child who has difficulties in managing money himself?

  61. JOE Says:

    Absolutely. You must handle this through a well qualified trust attorney who has expertise in this topic. The trust will act as a conduit to pass through the RMDs, and perhaps a bit of flexibility so the trustee can withdraw for emergencies, if necessary. One key point, while the IRA owned is alive, no transfer is made, the assets are not put into trust until the owner has passed, and even then, the wording for the trust is important.

  62. Leah Says:

    Hi Joe,
    My aunt and I are listed as TOD on my grandmother’s IRA (about $22,000). My grandmother died 1/7/2012. We missed taking her RMD out in 2012. My aunt took her 50% of the IRA out in October. I have not done anything yet. What do I do about her RMD for 2012? What do you suggest I do with my half of her IRA ($11,000)? I am 42.

  63. JOE Says:

    The missed RMD must be taken out now, and has a 50% penalty. The amount is also taxable to you. I don’t know what Grandma’s age was last year, a look at Publication 590 will tell you the RMD that should have been taken.

    My current article Qualified Charitable Distributions would avoid penalty, by allowing you to donate the entire RMD amount.

    At 42, your RMD is just over 2.5% of the year end account balance. I’d invest in a low cost S&P Index mutual fund, and let it grow over time.
    I’m sorry for your loss.

  64. Lisa Says:

    My friend passed away in mid 2012. She had a will and named me as her executrix. She had closed all of her bank accounts before her death (suicide). The only property she owned was in Mexico and she and her ex-husband owned that together, luckily she left that to her ex-husband. Plus they were selling the property at the time of her death.

    The only thing she had at the time of her death were mutual funds and a IRA. Her broker/financial adviser/representative said she had removed all beneficiaries from all mutual fund accounts and her IRA. So this meant that the accounts went to her estate, which is what she wanted. It would be easy if she had noted a few beneficiaries, but there are a total of 10. One of the beneficiaries filed for bankruptcy and another has no tax ID. Some beneficiaries are here others are out of state.

    Since there were NO funds to pay for her funeral, bills, taxes, etc. I cashed out all of the mutual funds and her IRA. The court makes you file a 90-day inventory. Her broker/financial adviser/represent told me at the beginning of June that I should just leave everything in and take out what was needed to pay bills on her behalf. However, because of the fluctuation of the market, her accounts had lost over $20,000 from the time of her death to when I was able to meet with her broker/financial adviser/representative (I met with him after I had all of the appropriate paperwork from the court-letter of testamentary-showing I was appointed as executor). For the next 20 plus days the market kept going up and down terribly. I am listed as 1 of the 10 beneficiaries, but I did not want any of the other 9 saying that I lost money by not cashing out ASAP rather then waiting to see how the marker would do OR prolonging the distributions they are to receive.

    The amount of money left over (mutual funds and IRA account) after paying her funeral expenses, bills, estate expenses and pre-tax money I had taken out when the IRA was cashed in (25%) is $200,000 ($43517.00 is the actual amount I received in a check from her IRA account). In North Carolina there would not be an estate tax on this amount ($200,000). However, with the IRA being cashed out I wanted to make sure enough money was set aside to cover potential taxes and penalties. My friend was 43 when she past way. I just received the 1099-R from her investment company today. I obtained a tax ID for the estate because of this. I did this to make things as easy as possible since 9 other people are involved and I’m still not sure of the exact amount each of us will end up receiving from my friends estate (not to mention the bankruptcy issue with one and no tax id for another person).

    ***So, I’ve said everything, here is the question: For the estate, will additional taxes need to be paid and will there be a 10% penalty on the IRA withdrawal? I have not received any tax forms on the mutual funds that were cashed out.
    The exact amount of her IRA account was $64,966.42 before cash out ($16249.10 was taken out for federal tax & $5,200.00 was taken out for state tax). What else do I have to look forward to now? I just want to get everything done so everyone can be happy and move on.

    I will be filing taxes for her for 2012 (she did not earn anything due to disability, luckily she was still living with her ex-husband, she had recently applied for disability and was approved a few days after her death) They divorced in 2011, I’ve asked him for a copy of their tax returns from 2011, but he still has not given it to me. And I will be filing for her estate.

    Any advice you can lend would be greatly appreciated. Plus if you know of a great accountant in North Carolina. I spoke to three after her death and received different information.

  65. JOE Says:

    First, I am so sorry for your loss.

    This is a pretty complicated situation. I can tell you that there will be no penalty on the IRA being taken out after her passing, but the total withdrawn is taxable. Since it was taken out before being distributed to her heirs, the beneficiaries, the tax is probably owed by the estate and her 2012 tax return should first be filed before distributing any of the remaining funds. Given the size of the estate, no federal estate tax would be due, only the tax on the IRA distribution. I assume when you say there are 10 beneficiaries, these are all noted on the will, correct? Given the amount involved, you may want to consult an attorney that specializes in settling estates. This may be a bit beyond my expertise.

    For future readers – the woman who passed away and deleted all beneficiaries from the IRA account cost her friends some money. Each of them should have been able to inherit a $6500 IRA and take tiny withdrawals over their lifetime. A small hit, $1600 each, but money they could have saved from Uncle Sam.

  66. Cyndi Says:

    Joe, my parents are in their 80’s. just sold their house to move closer to us so we can take care of them. In order to find a place I had 115k in an IRA I wanted to use to purchase a house for them. But I am being told because they are my parent I can not use my IRA on a house they would live in? I thought I was doing the right thing by helping my parents? They have 100k to put into a house but we had relied on my 115k to add to their monies so they would not have to take a mortgage. Any ideas or suggestion on how I can use my money?

  67. JOE Says:

    The rule you are thinking above is that first time home buyers are permitted to take $10,000 from each their IRAs (for a couple) with no 10% penalty. There are two key points here. “First time” buyer and “no penalty.” This has to be a purchase for your own home, not a parent. More important, tax is due on withdrawal, it’s only the penalty that’s avoided.

    If you are 59-1/2 or older, you’d have no penalty anyway, but the tax is likely to put you into a higher bracket than usual. Very kind of you to want to help, but you need to understand the potential cost.

  68. Virginia Jingst Says:

    I have tried to read these posts but there are so many with all sorts of problems I’m just confused now. My cousin and I are listed on an Aunt’s IRA as beneficiaries. Its only $15,000. Her will states that all assets be split between 9 nieces and nephews. We both feel this includes the IRA. For simplicity, and lets face it when you split it 9 ways it won’t mean much, we would like to cash it in and then split it. Is there a way to do this and make everyone responsible to pay their own taxes on it?

  69. JOE Says:

    The IRA beneficiary form takes president over the will. You present a broker with a death certificate and they acknowledge the money is yours. No lawyer, no probate.
    If you really wish to split the money, you need to tell the broker you wish to both disclaim your right as named beneficiaries. Once the will is presented and probated, the broker will hand out the remaining money 9 ways, and each beneficiary pays their own tax. Not inheritance tax, but income tax.

  70. Virginia Jingst Says:

    Thank you so much that was the most straight forward answer I’ve gotten!

  71. Gary Says:

    Joe, really enjoyed reading all of your info here. My wife’s mother recently passed away, with both my wife and my wife’s sister named as 50% beneficiaries on her IRA. It is a very small account, about $6100, from which she has been taking her RMDs. There was also a substantial savings account at the same bank that had all 3 of them named as joint account holders with right of survivorship. My mother-in-law died without a will and no contingent beneficiaries on the IRA. Five days after her death and before anything was done to split and transfer title to the IRA or deal with the savings account balance, my wife’s sister died, also without a will. Our attorney says that the savings account passes directly and soley to my wife as a joint owner and since that account was the only other asset other than the IRA, there will be no probate opened or estate established for my mother-in-law.

    I’m not particularly concerned about my wife’s share of the IRA. Like I said it’s a small amount, we’ll go to the custodian once we have the death certificate, take title to her share, and will probably just cash out the $3000 or so that will be hers rather than deal with the record keeping on a very small RMD. But I’m a bit confused and concerned about what happens to the 50% that would have gone to her sister. My assumption is as a matter of law, that 50% became hers immediately upon her mother’s death and would now have to pass through her estate via probate to get distributed. All well and good. But I anticipate some rather complicated probate matters concerning her sister’s estate and I don’t want my wife and her responsibilities for closing out her mother’s affairs to get bogged down and unneccessarily entangled in that. It will also be somewhat complicated by the fact that my sister-in-law’s family and estate handlers will all be out of state. So while it will be very simple for my wife to go to the custodian, which is in our home town, and present her beneficiary credentials, it will much more involved process for her sister’s estate. I don’t want to show up there and be told we have to come back with my sister-in-laws estate representative to make any kind of move.

    What I’d like to see happen when my wife and I go to the custodian is 1) get them to take out her mother’s required 2013 RMD and deposit to the savings account that still has her mother’s name on it (remember, no estate established for mom), 2) take mom and the sister’s names completely off the savings account based on the death certificates (we will have a copy of both), 3) establish an IRA “Mom’s Name Deceased, for the Benefit of My Wife” and transfer 50% of the IRA balance to it, and 4) leave the remaining 50% in mom’s name and let my sister-in-law’s estate handlers figure out what to do from there.

    Once that’s done, we plan on cashing out my wife’s portion of the IRA, deposit to the savings account, then transfer the whole kit-n-kaboodle to our financial institution, leaving nothing behind except the 50% IRA due my sister-in-law’s estate.

    Not that it matters to this discussion, buy my sister-in-law was survived by a spouse and one adult son from a prior marriage. If she hadn’t passed, she and my wife would have closed mom’s savings account and split the proceeds. But with this turn of events, we didn’t feel it right that half of her mom’s savings should be distributed to a second spouse (who mom didn’t really like anyway) and further down the chain of descendants. We also have 3 adult sons and what we have decided to do is distribute $40,000 from grandma’s assets as $10,000 individual gifts to each of the four grandsons, and my wife will retain the remaining approximatley $100,000 as the sole surviving child.

  72. JOE Says:

    It looks like you got it all right.

    The savings account belongs to your wife, I agree. Unfortunate for her brother in law, who would have gotten half had the sister moved quickly on splitting the account, but, in effect, it was maintained as a joint account between the two sisters.

    As far as the IRA goes, you got it right on that as well, the designated beneficiary getting the 50% share and titling as you noted. She will have RMDs based on her age and in any year, can withdraw more, but not less than the RMD. The sister’s spouse would seek the remaining half of the IRA, but not as a ‘designated beneficiary,’ since it was never in the sister’s name. That makes it a probate matter although your state may have a de minimus amount before probate is required.

    For what it’s worth, this is why (a) retirement accounts should have contingent beneficiaries, and (b) when one passes, the heirs need to move fast. I understand here that only five days elapsed, which may make this last remark impractical in this particular situation.

  73. Paul Says:

    First, thank you in advance for your help. My wife (55) inherited a traditional IRA from a deceased parent. The parent was 71. She set it up as a beneficiary IRA and started taking the RMD. For a couple years we took the RMD, calculated the basis on IRA form 8606 and paid tax on the taxable amount. We don’t need the money right now so last year, she had the company holding the IRA investment fund stop sending the RMD to us and just reinvest it back in the same IRA fund. The 1099-R from that company shows the gross distribution (box 1), and that full amount as taxable (box 2a)–but the box for “taxable amount determined” (box 2b) is marked “No”.
    A) Can she legally reinvest the distribution back into the same IRA?
    B) Do we owe tax on it if we didn’t physically take the distribution?
    C) If so, how do we calculate how much of the distribution is taxable?

  74. JOE Says:

    Interesting – The RMD must be taken each year, need it or not. An RMD that’s not taken out of the IRA carries a 50% penalty. It seems as if the broker took it out for your wife, but redeposited the funds? An improper deposit only has a 6% penalty. This is better, but it’s still strange to me that the broker would ever accept a deposit into an inherited IRA, this is never allowed.
    Last, you mention 8606. Was some of the account post-tax money? Each year, you prorate the post tax balance over the year end balance and that ratio is the amount you are not taxed on when withdrawn. I hope this gets you closer to your answer.
    I’d like to better understand that transaction – “stop sending the RMD to us and just reinvest it back in the same IRA fund.” This is the part I’m unclear on.

  75. Paul Says:

    Thank you for your quick response. Looks like we have some cleaning up to do with the broker. Are the rules the same for an inherited Roth IRA–redepositing not allowed?
    Oh and yes, unfortunately the original inherited IRA is a combination of both pre- and post-tax money requiring the 8606.

  76. JOE Says:

    No problem Paul. Yes, an inherited Roth IRA has RMDs even though the owner, while alive didn’t have to take RMDs regardless of age.

    By the way, be sure to list new beneficiaries on the inherited accounts to make it easier when your wife passes. (May it not be for 55 more years!) The subsequent beneficiaries continue RMDs as when your wife took them, they do not recalculate based on their age.

  77. Deb Says:

    Joe, help me. I keep reading different rules about the 5 year rule for Roth distributions for a non-spousal beneficiary, or at least I’m having difficulty interpreting the rules. Mom died in late 2007. Did I have to take money out by end of last year or by end of this year (2013). If it was supposed to be last year and I missed it, now what? Am I going to get hammered on taxes?

    Do I take the distribution now and hope the IRS doesn’t catch it? What’s actually reported to the IRS on an inherited Roth IRA distribution? Can I plead ignorance? And was it the responsibility of my brokerage firm to notify me that this had to be done? Thanks so much for your help.

  78. JOE Says:

    I’m so sorry to hear this. If she passed in 2007, you should have started to take your RMDs in 2008. This would have let you stretch the IRA withdrawals over your lifetime. The next choice, especially if one missed multiple RMDs, is to empty the account by the end of the fifth year. 2012 in this case.

    Even though it’s a Roth with no tax due, there’s a penalty of 50% for the ammount not withdrawn that should have been. Yes, I’d empty the account, no tax due, and beg for forgiveness if the IRS assesses you the 50% penalty. You can make a case for the penalty being due ‘only’ on the 5 years withdrawals not taken if you were a designated beneficiary, i.e. listed as such on the account. I can’t comment on the broker. It’s not a simple matter.

  79. myesha Says:

    Hi i just turned 21 on sunday the 10 of this month of Feb my mom past away on Dec 12 2008 i just found out last month that my mom left me a IRA account i don’t know what to do im struggling financial because both of my parents are deceased and im living on my own what should i do

  80. JOE Says:

    There are a number of options.
    One choice for an inherited IRA is to withdraw all the money by the end of the fifth year after the deceased passed. That’s the end of this year. You’ll owe taxes on the withdrawal, but no penalty.

    If the amount is large, and the tax for a lump sum like this puts you in a high bracket, you might consider taking out 5 years worth of RMDs. The first four years of withdrawals ‘not’ taken carry a penalty of 50%. At 17, the RMD you should have taken in 2009 was the end of 2008 balance divided by 66, then 2009’s RMD was the 12/31/2008 balance divided by 65, and so on. You need to get the history of the account and do some math, but the good news is the 4 year total is approximately 6.2% total withdrawal and a 3.1% penalty.
    Again, if the account is 6 figures, you should consider this as it’s a way to stretch the remaining balance over the next decades, by taking these small withdrawals. I hope this helps. Let me know if you have a follow on question.

  81. Laurie Farnam Says:

    Hi Joe, I really need your answer to this question re: how my brother John’s IRA was ‘handled’ by the estate attorney and the Trustee. My only brother and sibling passed away in April of 2012. In his very quickly prepared Trust was an IRA valued of $50,700. I learned from my brother’s Morgan Stanley ‘broker’ that I had originally been named beneficiary of the IRA, but subsequently ‘removed’ apparently at the suggestion of the attorney and/or Trustee. At the time, I didn’t give this any thought as there was so much going on just dealing with my brother’s sudden loss. This IRA value was simply added to the entire estate value. MN estate state taxes have just been paid, but not the IRS taxes yet. I am demanding to see a copy of the tax return since I am affected by taxes. In the Trust Asset values, there is an amount of $18,000 (estimate) that I assume is slated for State and Federal taxes on this IRA. I have not confronted the Trustee or attorney yet… but this is an outrageous amount of tax.. I am the primary beneficiary of my brother’s estate, but he also left various amounts of money to 15 beneficiaries/friends. Apparently, we will all absorb this $18,000 tax. Please please tell me this action of the Attorney was ILL-ADVISED! If I had remained beneficiary on the IRA, would the $50,700 value been ‘taxable’ on the State estate tax level? In other words, my brother’s estate was just over 1,000,000 where MN requires payment of estate taxes. I’m wondering if the IRA $50,700 value helped “push it over” the million dollar mark? I need answers on so much right now because “they” are trying to get me sign a Disbursement Agreement and I don’t feel comfortable doing so right now!
    Joe, thanks so much (in advance) for your reply!

  82. JOE Says:

    Laurie – I’m sorry for your loss. The correct way to handle this would have been for the IRA to pass to you as an inherited IRA. No Federal Tax due at all, and no Estate Tax at the Federal level. I see that MN Estate tax starts on Estates greater than $1M, so, while no Federal Estate tax was due, MN might have had a bit of tax to pay.

    The $50,700 is now being taxed all at once, instead of you being able to take tiny distributions each year. This was bad advice by whoever gave this advice to your brother. I would grill them on this and tell them they just cost you the tax on this amount, which isn’t huge compared to the estate, but my goal is to maximize one’s wealth, not the bill to Uncle Sam.

    To be clear, the IRA would have still been part of the estate tax issue, but it would not have resulted in the income tax bill you are seeing had it been kept in the IRA.

  83. Sue Says:

    My father recently passed away and we found out the beneficiaries of his IRA are my brother and I. My mother desperately needs the money so my brother and I were about to sign the disclaimer so my mother would get the IRA. Unfortunately before my brother signed the disclaimer he passed away unexpectedly. Is there anything we can do to make sure my mom gets the entire IRA?

  84. JOE Says:

    Sue, first, I’m sorry for your loss.
    These things are rarely a simple answer when I don’t have all the facts. First, a beneficiary form should have primary beneficiaries, and it seems it was 50% Son, 50% daughter on the form. Was a secondary beneficiary listed? i.e. in the case that you and your brother had both passed before your dad, did the beneficiary form have a contingent beneficiary? If so, was it your Mom? If someone else was listed, you can’t direct the money away from them. You would need to take withdrawals and gift the money to Mom. If no one else was listed, your Mom can get the IRA, but it passes through the estate, probate, and then it has to be withdrawn by the 5th year after your dad passed. An IRA not inherited through the beneficiary form process cannot be stretched over the life of the beneficiaries.
    Last, if your mother was the contingent beneficiary, you simply disclaim your half, and it passes to her. If your brother has his own family, I believe they’d need to agree to this, as it’s part of his estate.

  85. Mary Says:

    Hi Joe, I have a relatively simple question that I cannot find black & white answer to. Simply if there is a beneficiary on the IRA. The owner passes and the beneficiary transfers it to a Inherited IRA. Can the beneficiary then assign his beneficiaries? Is MN law different on this issue?
    Thank You.

  86. JOE Says:

    Absolutely! An inherited IRA should have beneficiaries listed as well. The only ‘gotya’ is the next beneficiaries must continue the RMD schedule of the deceased, the clock doesn’t start again.
    e.g. Say my mom passes, and leaves her IRA to my 14 year old. The RMDs are based on my daughter’s age for the first year and the divisor number decrements by one each year after. At 14, her RMD is based on the number 68.9 the first year. The Life expectancy table is not consulted again, the divisor drops by one each year. In other words, the IRA has 69 years to distribute assets, but no more.
    The current beneficiary IRA owner should add the new beneficiary on the account and note the RMD numbers for the next generation. Thanks for this excellent question!

  87. Debbie Says:

    I have a letter from an attorney and a decree of separate maintenance to transfer a beneficiary IRA (from his mother) to the wife. Is this possible and how would it be done?

  88. Maggie Says:

    My dad died last month. He had a traditional IRA of $14,000. We found out from the bank that he failed to remove his ex-wife as his beneficiary. The bank has informed us that the ex-wife does not have rights to his IRA and it goes to me as successor of his trust. Being such a small amount my sister and I have decided to cash it out. The bank has informed me that this cash out must go to me alone as I am the first successor of the trust. My question is what are the tax implications for me and how best to then give half to my sister? How should the check be made out to me? Any advice would be greatly appreciated!!!!!!!

  89. JOE Says:

    It sounds like a QDRO – Qualified Domestic Relations Order – to me. The institution holding the IRA should be able to accomplish this.

    Typically, an IRA can only change owners on death. My wife and I don’t share an IRA nor can we move funds from one person to the other. A QDRO is a court ordered transfer that should be honored by the IRA custodian.

  90. JOE Says:

    First, sorry for your loss.
    I mean no disrespect to the bank employee, but the facts as you state them have the ex-wife as legal owner of that IRA. The beneficiary designation on an IRA takes priority over a trust or will. The bank is incorrect to go around a beneficiary designation on an IRA.
    That said, if you withdraw the funds, the tax is taxed to you as ordinary income, no penalty, and it’s a low enough amount that you can gift anyone you wish a portion of it. I suggest you reserve 40% for taxes, keep 30%, gift sister 30%, and then when you do your taxes in 2014, see how much tax was due with this extra income.
    An IRA inherited can also be withdrawn over 5 years, but no more. I’d usually suggest this to reduce the tax hit, but as you suggested, this isn’t a very large sum.

  91. Judith Scalzi Says:

    Both my parents died in 2012. I am a co-executor of their wills. They each left IRAs in the amounts of $30,000. and $32,000. They each named each other as beneficiaries of the IRAs with no secondary beneficiaries named. There are five beneficiaries including myself. Several including the other co-executor, want the IRAs dispursed instead of depositing the IRAs into the estate account. They would each pay the taxes based on their income level which is an advantage to them. I would prefer the estate receive the IRAs and pay the taxes at the estate tax level of 35%. For me to follow their plan, it would cause me to be bumped into a higher tax bracket than that of the estate. Question, is their plan legal? If so, is there a way fo me to take my portion of the IRA dispursal over a five year period?

  92. JOE Says:

    Their request is correct. It’s less common to want the estate to pay the tax, although I believe it’s an option. An IRA received outside of a proper beneficiary designation must be withdrawn by the end of the fifth year, so yes, you each have that option, of how to take the withdrawals each year.

    For my readers – I can’t stress enough – it’s important to have your retirement accounts reflect a beneficiary, and second beneficiary as well.

  93. Nicole Says:

    If my mother left no will and she named my brother sole beneficiary to her IRA, it was known for years it was to be split 3-ways between me and my two brothers. Do I have any right to that money? What if my older brother voluntarily became my mother’s executor to her estate, he hasn’t given me and my younger brother our fair share, he wants to use money to pay rent on apt my mother and him lived in. What are my legal rights?

  94. JOE Says:

    Nicole, I’m sorry for your loss, and situation. Unfortunately, the IRA passes strictly though the beneficiary designation on the account. Now, the executor, the brother, may kindly take the IRA into account when splitting the rest of the estate, but isn’t under any obligation to do so unless specified in the will.
    The second issue, the rest of her estate, is a legal matter, and you and your other brother should act fast to secure your shares of the estate.

  95. teresa johnson Says:

    I have been getting conflicting info from my financial planner in Virginia, and my father’s financial planner in Pennsylvania.
    I have two beneficiary IRAs inherited from my father. I am 52. While I understand that I will have to pay taxes on any amounts I receive, I’m being told by one planner that I will have to pay the 10% penalty if I take more than the required MRD, and the other is telling me that there is no penalty because it’s a beneficiary IRA.
    Can you please help me clarify this? I’m very confused, and I don’t know who to believe.



  96. JOE Says:

    I am 100% certain that in the situation you describe, taking RMDs from an inherited account, there is no penalty for taking more than the minimum. The first gentleman is mistaken. (And for my readers, the fact that Teresa is 52 is not relevant. The inherited IRA has an annual RMD, required minimum distribution regardless of the age of the beneficiary)

  97. Randi Davis Says:

    I am sole beneficiary to my brothers estate. He had an IRA worth over $340,000 and a house. There was no beneficiary name listed on IRA so it went into his estate. I obtained a Federal ID number for the estate and the first payment of 5 from the IRA went into the estate account as “Brother John Decd IRA FBO Est of Brother John, Sister Randi Exec” from Merrill Lynch as Custodian. I had them withhold over $9,000 Federal Taxes from the first payment of almost $70,000. I also received the RMD in my social security number since I am over 70.5. My tax accountant has it figured that the estate owes an additional $13,000 of Federal which brings it up to about $23,000 and $4300 in State taxes. The money is sitting in the estate account. I understand I have to file a 1041 estate tax return because Merrill Lynch sent me a 1099-R on the almost $70,000. My questions to you are: Does this seem like the proper amount of taxes for this money and when I withdraw this money from the Estate Account, since I am the sole beneficiary, do I have to pay more taxes for it on my personal tax return? And also when do I have to take the money out of the Estate Account? If I leave it in there until the 5 years are up, will I have to pay taxes on it again when I withdraw it. Should I close out the estate and just have this desposited to my personal bank account? I am very concerned about all of this and my tax accountant or Merril Lynch cannot give me a direct answer. Thank you so much.

  98. JOE Says:

    I am sorry for your loss.
    The estate should be settled and closed as soon as possible. The fact that your brother didn’t list beneficiaries on his IRA is a problem, but it’s behind us, no going back.
    As you know, the impact is that the IRA must be distributed over a 5 year period instead of the lifetime of a beneficiary. There’s an exception to this, if he died after the ‘required beginning date’ RBD (70-1/2) then the distribution period is the IRA owner’s life expectancy calculated in the year of death, reduced by one for each subsequent year. If this wasn’t the case, the 5 year rule prevails.

    But the IRA itself should not remain in the estate, nor should tax be paid under the estate’s ID. The IRA should be in your name as an inherited IRA and withdrawals, whether over his calculated distribution schedule or the five years, is to you at your marginal rate.

    Please write again if you have any further question or follow up needed. I’m sorry to say, the pros get this wrong all the time as the laws regarding IRA accounts are too confusing for most.

  99. Brandy Hatton Says:

    Joe, My mom died in September of 2012. She left an ira with 270, 000 in it. I split the ira 40/40/20 with my sisters to be fair. I did this because I also got her house and car. I was trying to be fair. My sisters promised to help pay taxes. Now that they have found out how much they are they refuse to help me. I feel extremely stupid for trusting them. Is there anything I can do ?

  100. JOE Says:

    Brandy, I’m sorry for your loss. This seems to have become a family/legal matter. If the IRA listed you as sole beneficiary, you should have been able to keep it in tact, avoiding a large tax bill. RMDs (required minimum distributions) would be due each year, but these would have been small and depend on your age. You then would have been able to gift from that withdrawal each year after figuring out the tax. A 100% withdrawal was the costliest way to handle this, as all the money would be subject to your highest tax rate, and the amount you owe for this withdrawal is probably over $70K, less than you kept for yourself.
    You might be able to sue them to recover the taxes due on their proceeds, but I am not a lawyer, and don’t know whether you’d succeed, as they can maintain it was a gift.
    Last – you should research Form 709, the gift tax return. In 2012, you could only gift $13,000 to an individual with no gift tax consequences. Form 709 permits you to take a credit against your lifetime gift limit, no tax will be due, but this form is needed to disclose these gifts.

    I hope my readers can benefit from this story. I’m sorry I could not help more.

  101. Donna Says:

    Help! I’m so confused… My Father passed in Aug. 2011 and his Roth IRA was transferred to my Mother’s account. My Mother passed away in Feb. 2012 and my brother and I received a check for 1/2 the amount (@ $25,710). I put my portion in my Mom’s Estate account and shortly thereafter transferred my portion into an Annuity Fund offered by my bank. I received Form 1099-R as beneficiary with my social security number. My question is, do I have to pay Federal Income taxes even though I moved it into an Annuity?

  102. JOE Says:

    Let’s take it a step at a time –
    When Mom inherited Dad’s Roth, it became her account. No issue there.
    When you and your brother inherited, it should have remained as an Inherited IRA, to offer you the chance to keep it growing tax free as you take RMDs. But as you note, it ws withdrawn. Since it was a Roth IRA, no taxes are due from either of you, regardless of the subsequent investment.

  103. Rob Says:


    Thanks for all of the great information you have provided! I have a question that I’m hoping you can shed some light on. My father passed and left his IRA to myself and my brother, each of us inheriting a 50% share of the account. My brother is proposing to sign over his share to my name, and then have me cash out his 50% amount because I’m in a much lower income income tax bracket and live in Florida with no state income tax. Then he suggests that I write him a check for the amount I receive, after proper taxes are withheld according to MY residency and tax bracket. My question is, is this even legal? What are the implications of doing this? He says his tax attorney says it’s completely legal, but something doesn’t seem right about it to me, I somehow feel like this is backdoor way at tax evasion. Thanks for your help!

  104. Joe Says:

    A note to my readers – this question was featured as a full article at my companion site RothMania today in an article titled The Step Transaction Doctrine. At RothMania I focus on the Roth IRA, the Roth 401(k), as well as other retirement account issues.

  105. John Says:

    This has been an amazing read following through all of your queries and comments. I am in Maryland where many people put together a by-pass trust so that the $1M exemption from State Estate Taxes is not lost when the first spouse dies. Since 90% of our non-house assets are in two IRA’s (one for my wife and one for me in approximately equal amounts), the only way that such a trust accomplishes the desired result is to make each of spouse’s Trusts the beneficiary of the IRA’s. What I have slowly begun to realize is that if we simply designated our two kids the beneficiaries of the IRA’s it would accomplish much the same goal without going through the hassle of establishing a trust. In the event of both parents passing the kids get all the IRA’s anyway. We have retirement annuities that cover daily expenses so that these investments are really only used for paying out supplementary income. Does it make sense to you that we keep things simple by just using the beneficiary part of the IRA to pass along the bulk of our assets to the kids?

  106. Joe Says:

    As long as you wont need access to your wife’s IRA (or vice versa) if she passes first, your plan sounds fine.

    Trusts are great for certain purposes, but as you discovered, the beneficiary designation on retirement accounts is adequate for most people. Remember, Insurance is considered part of your estate if you own it (i.e. regardless of beneficiary, if you control the insurance, you are the owner).

  107. Joe Says:

    Click where it says ‘subscribe’!

  108. Andrea Says:

    Hi, my dad past away back in March and left an IRA account to be split between me and my 3 sisters. We all took the lump sum. I would like to put the money into an IRA under my name. WIll this save me in paying taxes on this money and how long do I have to make this decision/

    Thank you

  109. Joe Says:

    If you took a withdrawal of your share, you can’t put it back into an IRA, that option no longer exists. The proper way to do this was to maintain the IRA as an inherited IRA and start to take required minimum distributions next year. If this was all pretax money, you owe tax on the full amount.
    The best I can suggest is that you increase your deposits to your 401(k) or IRA and use this money to help offset those deposits.
    To be clear, inherited IRAs have no 60 day rollover option.
    I’m sorry for your loss.

  110. Kim Says:

    My father died in late November of 2012. We are now finishing his tax return. He had several IRAs that were transferred to us children as beneficiary IRAs in January 2013. He had not taken all of his RMDs for 2012. One of the IRA institutions withdrew(in 2013) what their RMD was from his account before transferring the balance to us heirs. They sent each of us a check in 2013. It is noted as an a RMD for 2012. The total actually is much more than he needed to take as he had already withdrawn most of what he was required to take out of his IRAs for 2012 from other accounts. I know that a waiver of the 50% penalty needs to be asked for. When doing his tax return for 2012 do we tell IRS that the required minimum distributions were not taken and then ask for a waiver of the 50% penalty on his return or is that something that needs to be done when we file our own returns for 2013? Basically, who needs to ask for the waiver of penalty? Him, or the heirs?

  111. Joe Says:

    You said “It is noted as an a RMD for 2012.” If that’s the case and the 1099 reflects that, the RMD for 2012 is satisfied.

  112. Kim Says:

    It is noted as 2012 RMD but it came in our social security numbers, not my dad’s and the RMD was received in 2013. I think I didn’t make it clear that I was referring to the RMDs that my dad had to take in 2012 which would have been based on the account balances as of Dec 31, 2011. Sorry about that.

  113. Joe Says:

    I believe I understand the details. I am reading from Ed Slott’s “The retirement Savings Time Bomb” p128:

    “If an IRA owner names an individual (a son or daughter, for example) who is not the spouse as beneficiary, it will generally not matter whether the owner dies before or after the RBD because non-spouse designated beneficiaries get to use their own life expectancy is to calculate post death RMDs on inherited IRAs, the first of which must be taken by the end of the year after the year of the IRA owner’s death.”

    This reads to me that the deceased is never penalized the 50% for a missed RMD, and that you now take RMDs as beneficiaries based on your own ages and the 2012 year end value of your share.

  114. Gretchen Says:

    Thank you for your easy-to-follow explanations. I’ve just finished reading every entry and am hoping you can help me out. My situation is similar to that of entry 29. My mom passed away 6/2007 at age 67. She had two traditional IRA accounts, and my two brothers and I were named the beneficiaries. Unfortunately, my brother did not do anything with the account, and now that I am researching, I believe that we should have taken RMDs within the first year of her passing in order to have the stretch option. We have never taken any RMDs. Although Dec. 31, 2012 would have technically marked the 5 year point, I found one article that said that because 2009 was such a tough financial year for people, RMDs were not required for 2009. In turn, the year 2009 does not count toward the 5 year rule. Is this correct? Is our only option to take all the money out (about $220K) and suffer the tax consequences? Is there any recourse? I have heard there is a 5329 waiver form and that sometimes a letter to the IRS can help. I’m confused about what our options are at this point and would so appreciate any advice.

  115. Joe Says:

    Hi Gretchen, I’m sorry for your loss. You are right about the choices. IRA rules are so complex, a sympathetic agent getting the 5329 waiver may accept the excuse, and let you take the 4 years of missed withdrawals. I’m unaware of any delay to the 5 year rule even though there was the year with no RMD.

    Before doing this, I’d do the math. If you were 40 when Mom passed, your first year RMD was 1/43.6 or 2.3% of the balance. When you add the 5 missed years, the total might add to just 15% or so. So a 50% penalty is half of the missed withdrawals or just a 7.5% total hit, less than the extra tax of each taking $110K all at once and getting thrown into a higher bracket. See publication 590, and form 5329, and let me know if you have a follow on question. Good luck to you!

    Update – indeed, the 2009 waiver extends the 5 years to 6, per and the sentence “If a beneficiary is receiving distributions over a 5-year period, he or she can now waive the distribution for 2009, effectively taking distributions over a 6-year rather than a 5-year period.” So, it appears you can choose between a tax hit now or try to get forgiveness on the missed RMDs. If you don’t get the forgiveness, you can still choose between emptying the account and paying the tax or keeping them going, but pay the 50% penalty.

  116. Jessica Says:

    Hi, My father-n-law passed away Jan 2011. His 401K account was split equally among 3 children, one being my husband. 1 child kept the $ as a qualified account and did not take any withdrawals. We took our portion as a lump sum withdrawal and had taxes withheld. The grand total was $96K and we rec’d $72K after taxes. We just this past weekend received a tax bill for $10K. The IRS is stating we had $96K of unreported income, but we had them withhold taxes before sending us the $. Thoughts? How can I determine enough was withheld initially?

  117. David Says:

    I inherited an IRA from a parent a few years ago and have been making the minimum required withdrawal since then. Should I decide I now would like to gift this IRA to my 3 children (divide it equitably), can this be done?

  118. Joe Says:

    David – If they were contingent beneficiaries, you could have disclaimed your share and let it flow to them. It’s too late now.
    The best you can do it to take the RMD, pay the tax, and gift them the proceeds, up to $14K/yr per child (or $28K/yr if you joint gift with your wife to the kids.)
    If your children are old enough to work, this money can be used to fund their own Roth IRA, up to their income or $5500, whichever is lower.
    Be sure to update the beneficiaries on the IRA now, it’s easy to forget to do this. I’m sorry for your loss, and wish you well.

  119. Joe Says:

    Jessica – It sounds to me like you made a small mistake. Did you include the $96K on your tax return, and also mention the $24K that was withheld? From what you’ve told me, it looks like this was an oversight, and you still have the chance to amend your return. Instead of a tax bill, you may be in line for a refund, as they say you we $10K, but had $24K withheld for taxes.
    Note – whether or not enough was withheld initially, it’s that year’s return where the reporting and reconciling occur. Let me know how it goes. Thanks for writing in!

  120. Denise Says:

    Hi Joe – great site! My Mother passed away recently and left a traditional IRA to myself, my minor daughter and a small portion to her sister. The portion for my daughter is $48k. We are in NYS. The company managing the IRA said they cannot transfer the portion designated to my daughter as she is a minor – what are our options? As a side note, the named executor of the estate (the sister), has been awful to my daughter and I excluding us whenever possible. The lawyers that wrote the will said that there is nothing in the will regarding setting up a trust for my daugher.

  121. Joe Says:

    I happen to use Schwab, but this would work for Fidelity, Scottrade, etc.
    Go to a Schwab office or get an agent on the phone. Ask for a direct transfer of the account to the new broker. It will be titled as Mother’s Name, Deceased, for benefit of Granddaughter’s Name, and you will be the custodial on the account. Your daughter will have an RMD each year, which will be taxable, but small enough that it should not trigger Kiddie Tax rules. Having a minor inherit an IRA should not be an issue. You should not keep the funds with the current company. They are on track to give your daughter an unneeded tax bill. No trust is needed. An IRA with beneficiary designation passes outside of any will.

  122. Mina Says:

    This site has a lot of useful information on IRAs. Thank you. My ex husband named me a beneficiary on his rollover IRA. He passed away recently. I am trying to find out what rules apply in this case. Do the rules for non spousal beneficiaries apply? For instance taking distributions depending on my life expectancy? Or can it wait till he would have turned 70 and a half?

  123. Joe Says:

    Exactly right, you are a non-spouse beneficiary and will need to start taking withdrawals based on your life expectancy. See publication 590 for the table you’ll f
    Refer to for your first withdrawal.
    Thanks for writing in, I am sorry fr your loss.

  124. Britt Says:

    My grandmother passed away last month. My father spoke with my mother yesterday and insisted she get my SSN and to do whatever it took to get it. I am hesitant on giving my SSN because something doesn’t feel right. He told my mother that him and his sister, my aunt, cashed out the IRA and paid the early withdraw fees & taxes but they need my SSN because there was some that they couldn’t get and they want to list me as the beneficiary. Does this make any sense to you

  125. Joe Says:

    None of these makes any sense. They cashed out the IRA, but no fees or tax is due until April on their tax returns. As far as giving you anything, your father needs to tell you exactly what he’s transferring to your name. You should be going to the bank or broker in person and he should not need to act as intermediary. If he has no access without your number, it seems to me that you are the beneficiary, and he has a legal obligation to tell you what it is.

  126. Britt Says:

    I have been really confused about it all day. Then today my aunt text me and asked me if I gave my dad my SSN. I told her no and asked why. Her response was papers and then text again and said legal stuff. I told her I didn’t understand why my SSN was needed since her and my father cashed everything out. She replied with no there is more stuff and then said it is for my benefit. You answered some of my questions with your repsonse which I appreciate very much. So should I just ask them what they are transferring to me? If they need my SSN then I should be able to speak with someone from there and see what is going on right?

  127. Joe Says:

    Yes, I’d ask to meet with the institution holding the funds.
    I am trustee for my Mother In Law’s Estate. If her other daughter wants her inheritance, and not give me her SS#, I just send her into the Schwab office and tell her the account number she’s inheriting. No hiding anything to do my job.

  128. Kelly Galus Says:

    Unfortunately, this happened about 10 years ago, but some things came up and now I have questions. I was the executor of my father’s estate. Everything was split between my brother and myself. My father had an IRA worth $70,000 which the attorney cashed in. In 2003, I received a 1099 in my name and social security # on behalf of my father for the IRS. I had to claim the whole $70K on my 2003 income tax return and pay over $13K in state and federal income tax that year. If it was split between my brother and I, why did the 1099 come in my name only? So, actually my brother made out?

  129. Joe Says:

    Kelly – thank you for visiting and writing today. I’m sorry for your situation. More so, I’m sorry that so much time has passed. Multiple mistakes were made in the events you describe. The account should have been split into two separate accounts after your dad passed. This would have given each of you the option to take distributions over your lifetime if dad’s IRA had proper beneficiary designations listed. If the IRA passed without such designation, via a the will, you still would have had 5 years to withdraw the money.
    More important, splitting the account would have split the income to claim on your taxes. It’s not proper for one beneficiary to pick up the bill for money another beneficiary received. Your brother avoided the tax on his half of the IRA. He might not have realized at the time that IRA withdrawals are potentially taxed to the beneficiary, they are inherited tax free, but are still taxed on withdrawal. The lawyer should have known better.

  130. Audrey Says:

    Fascinating read here.

    We’re in limbo right now with inherited IRAs. Mom died in 2011 and her living trust was named the beneficiary of three separate IRA accounts. Her financial advisor worked with trust beneficiaries and the lawyer/trustee so that we could elect the stretch option by setting up properly named inherited IRA accounts.

    Unfortunately the trustee filed death benefit claim forms electing lump sum distributions with funds further distributed to financial institutions for the new IRA accounts.

    The trust received 1099-R forms for the full amount of the distributions as death benefits. The amounts are not reported on Form 1041; a copy of this return was received last week.

    I’m of the opinion that the “fatal error” made by the trustee in liquidating the IRAs will result in them being disallowed by the IRS and thus we should be reporting the distributions as taxable income now. Unfortunately, neither tax accountants or our lawyer have come to that conclusion so that we are still sitting in limbo.

  131. Joe Says:

    Are the IRAs now titled, “[Name of Mom], Deceased, for benefit of [Name of Daughter]”? Assets can be sold within the IRA without triggering any tax or issue at all. The key thing is that assets be kept as IRAs, an the direct transfer made to the new institution if that changed. It sounds like the trustee may have gotten it right.

  132. Audrey Says:

    Joe, the trustee elected lump sum distributions and received three checks which were deposited into a money market account INO the trust. Seven months later, she had checks sent to financial institutions, payable to the new inherited IRA accounts. Trust received 1099-R forms showing full distributions; these would not have been issued if proper trustee-to-trustee transfers had been done?

    I don’t see this as assets being sold within the IRA-my view is the IRAs were liquidated with proceeds deposited into the trust account?

  133. Joe Says:

    Excellent point. I’d sit with the trustee to make sure all was done correctly. I’d like to understand how the 1099-R was handled by the trustee if the 1041 didn’t show this as income. A transfer does result in a 1099-R. When I transferred a pension buyout, I saw a 1099-R and it was reconciled by claiming the transferred deposit. So the 1099 itself isn’t definitely a sign of an error.

  134. Audrey Says:

    Joe- we have had to hire a lawyer due to difficulties with the trustee, who is non-reponsive to requests for info. She has reported no IRA activity to the IRS, not even 2011 RMDs which were taken while Mom was still alive. She prepared “informational” 1099-Rs for beneficiaries coded rollover, but did not send them to the IRS or the beneficiaries. They are part of the file copy of the tax return. The way I understand it, info reported on 1099R and 5498 will not match up, triggering a notice from the IRS.

  135. Audrey Says:

    Wish we could sit with the trustee, but she is uncooperative. We now deal with her through a lawyer, who will be asking her questions on the return. I wonder how her approach is justified, especially because she did not report one beneficiary’s lump sum distribution.

    Thanks for your help, Joe.

    Peeps out there, please do your homework before taking any action. We (ten beneficiaries) are looking at having to pay out over $400K in taxes. That is a big OUCH to me. :(

  136. Mike Says:

    My daughter has an inherited IRA and is receiving RMD’s. Since she was a minor when receiving the inherited IRA I was listed in the title as Guardian. Now that she is an adult I would like to re-title the inherited IRA without me listed as Guardian. The broker that has the account sent me a new application containing 24 pages for her to complete in order to accomplish this. I want to make sure she will not be “breaking” the inherited IRA and then subject to the 5 year rule. I obviously want to keep the RMD provision intact.
    Should I be concerned with how this is being handled?
    Thank you.

  137. Mike Says:

    Joe – Need help with a question regarding renaming an inherited IRA. My mother’s fiancé died and left her as the named beneficiary on his IRA. It was correctly renamed “Bob (deceased) fbo Emily”.

    My mom then named me as her beneficiary on her new inherited IRA.

    My mom has since died and now I am her named beneficiary. Do I rename this inherited IRA for me as “Bob (deceased) fbo Mike” since he was the original account owner, or should it be renamed “Emily (deceased) fbo Mike”?

    Not clear on this since I am the 2nd to inherit and everything I read indicates to retain original account owner’s name when renaming an inherited IRA.


  138. Joe Says:

    Yes, you are right to be concerned. It’s too easy for retitling to go wrong.
    In this case the title should be identical, but remove the guardianship. It’s still “Deceased name, for benefit of Daughter name” only the mention of you falls away. No check is cut, and the account number shouldn’t even change, really, just the titling.

  139. Joe Says:

    You are right to be concerned, I believe it’s the former, “Bob (deceased) fbo Mike” should be the new title. The broker should be able to guide you on this.

    One important point. The math of the RMDs continues from your mom’s numbers. i.e. you take her last year divisor and subtract 1 each year, no reset to your age/RMD divisor. Make sense, I hope?

  140. Vivian M Says:

    My sister, age 66, died and left her IRA in equal shares to me, age 69, and my older sister. age 71. This IRA was a substantial amount.($250,000.00 each) My older sister died recently and I am named the only beneficiary of her inherited non-spouse IRA, which is in my first sister’s name plus my older sister’s name as beneficiary. Now, since I am a second generation non-spouse beneficiary, how should this IRA account be renamed,and can I continue taking distributions based on my older sister’s age since she already started taking her RMD’s. What options do I have for taking distributions from this second generation beneficiary IRA account. I started taking RMD’s from my half of the IRA account in my first sister’s name in 2011. Please adivise

  141. Joe Says:

    Vivian – I believe the titling becomes Original Owner, Deceased for Benefit of Current Beneficiary. Check with the broker, they should be able to offer advice.

    The RMD calculation does not start over. You take the Divisor Sis was using to calculate her RMD, and continue to subtract 1 each year. So you now have 2 inherited IRAs with 2 different RMD divisors to use. Remember to update both accounts to show new beneficiaries. And it would be kind to leave paperwork showing the RMD divisors they need to use. Unless, of course, it’s a charity.

    Last, remember, RMD means minimum, not maximum. It’s ok to take more each year if you need to.

  142. julia Says:

    what were the rules in 2006 for inheriting ira and a 403b? could a child take them over a lifetime and not cash out or take them over 5 yrs. if not..what happens if the took lifetime distibutions and now it has it has been 8yrs?

  143. M Anderson Says:

    i am beneficiary of a traditional ira (401k) IN INDIANA that was supposed to be disbursed 2 years ago but wasn’t (didn’t know of deadline); can i ‘rollover’ this account into my own ira directly or must i take it out, pay taxes and penalties and then invest it into my own ira?

  144. Joe Says:

    Yes, so long as the child was a named beneficiary, and the account was kept with proper titling. This is one of the best reasons to choose a child as beneficiary, the current rules permit a lifetime stretch of the RMDs.

  145. Joe Says:

    There are two ways to go:
    (a) calculate the required distributions for the two missing years, take those withdrawals, pay the penalty and tax, and then take the regular distribution each year.
    (b) withdraw the entire balance by the end of the 5th year. In which case, it’s tax due, but no penalties.

  146. Judith Says:

    Question: There were no living beneficiaries to my mother’s IRAs. They therefore became part of her estate. They were cashed and distributed by the estate. The estate paid more than 30% tax on the IRAs. Did the estate pay too much?

  147. Joe Says:

    Instructions for form 1041 show the tax table for trusts or estates. See page 29. It’s 35% for income over $11,650. In my opinion, the IRAs should have been distributed in tact, and you’d have had 5 years to withdraw the account down. At your rate. I’d take issue with the executor of the estate.

  148. Mary P Says:

    My dad died in Jan. 2013. He left his ~$10,000 ira to me and my brother equally. We thought the financial institution would send us an RMD, but they did not last year, so I think we need to pay a penalty on the money. Is it okay to withdraw it all now, in 2014, and pay what penalty for that next year? Thanks!

  149. Joe Says:

    You can avoid the penalty for the missed withdrawal by withdrawing all funds by the 5th year. The balance is small enough, it won’t hurt your taxes.

  150. Mary P Says:

    So, for clarification, I do not need to return the form the financial institution sent to us? It asked how much federal income to withhold and then gave options of lump sum (taken by 12/31/14), transferring the funds to another institution, or periodic payments over __ years (annually, semi-annually, quarterly, monthly)?

  151. Joe Says:

    Apologies, Mary. If he passed in ’13, RMDs begin this year. For this small amount, I’d suggest taking out $1000 each year for you and brother ($2K total) and finish with the account in 6-8 years. No penalty, no 5 year rule if you were properly listed beneficiaries.

  152. Mary P Says:

    I talked with a financial counselor who said the his RMD needs to be taken now for 2013 because it wasn’t taken then. After that, we can take the money according to the 5-year rule. I may not have stated that he had been taking RMD’s.

  153. Mary P Says:

    Since we failed to take the RMD’s for 2013, and have taken them in 2014, do we need to file form 1310 this year, and is it for each of us? They gave us the RMD in each of our names (half to each)? Or do we wait until next year to file form 1310. I don’t really have to file a tax return for my dad this year.

  154. Mary P Says:

    Oops, not form 1310. I was referring to the form you fill out for IRA’s.

  155. Ashley Says:

    My father passed away in February of this year, and we just found out he left his IRA to be split between me and my siblings. Each of us are set to receive a little over 30K. I am married, and both of us work full time. We also have a dependent that we claim. How do we know the right decision in taking a lump sum, or splitting it up? Based on what I’ve read here, a lump sum is not the way to go. I am subject to 10% federal withholding, as well as 6% state withholding. Am I correct in understanding that I will then be taxed AGAIN at the end of the year when filing my taxes? How do I know how much I’ll be taxed? I’ve read the documents you’ve referred to in earlier posts, but am so confused now! Can you simplify, and give a “blanket” number breakdown based on the info I’ve provided? If it’s any help, my father was born in 1943, but that’s all the more info I have on that. In addition, do they pay out immediately, pending the decision? For example- If I selected a lump sum, would they send me payment right away, or do they have to wait for my siblings to get their paperwork in also?

  156. Mary P Says:

    I filed my taxes and then thought I would report the RMD. Sent it to a family friend to fill out. He got more money for me but did not report the RMD as late because the form did not say late. I haven’t mailed it in because I think ignorance of the law is no excuse. Do I send it in with Form 5329 and a check? If it all goes in together and they owe me, where do I send it?

  157. Emily J Says:

    Hi! My uncle passed away on July 16, 2014. Upon his death, I learned that I was to receive 25% of his IRA and take possession of his Jeep. 50% goes to his son and the other 25% goes to his ex stepdaughter. His house also goes to his son. He has a will, but myself and the other two are listed as beneficiaries of the IRA. My other uncle who is the executor of my deceased uncles will, says that it has to go through a probate period, which should be around 6 months, because of house and vehicles. I guess my question is this: do I have to wait that 6 month period since I am listed as a beneficiary? Also, which is the best way to receive the money where the taxes are crazy? I’m to get some where around $200,000 as my part. I am 27 years old and am unemployed at this time because I stay home with my kids. Does the fact that I have no income change how much the money will be taxed? I have to be honest…I am completely clueless when it comes to understanding any of this. I have no idea who I would even talk to to see what my best option would be. Any advice you could offer on this would be deeply appreciated. I just don’t want to mess anything up Thank you for your time!!

  158. Joe Says:

    Sorry for your loss. A beneficiary-designated IRA does not go through probate. You should tell the Uncle he is wrong, and you should be able to show the broker or bank a death certificate to take possession of your quarter.

    Don’t take the money out yet. Have it re-titled to “Name of dead uncle, deceased, for benefit of Niece name.” This is now a beneficiary IRA. So far, no taxes at all. Consult Pub 590 for how much you ‘must’ withdraw each year. Then use tax software to see how much you ‘can’ take out without passing the 10% bracket. You may only have to withdraw $5000 or so, but up to $20K each year might still have no tax at all. I hope this helps.

    The worst thing anyone can do is to withdraw the account 100%. This would be all taxable, and even with no other income, a huge ta bill would follow. It must stay in the beneficiary IRA as I described.

  159. Emily J Says:

    Thank you so much for the advice! I plan to meet with an advisor on this issue when the time comes. The information you gave will allow me to do a little more research on it and hopefully be able to keep up better when talking with an advisor!! Thanks again!!

  160. Mike Says:

    My mother cash in all of her accounts some being IRA’s it total about $100K and put the money in my and my sisters joint account. She did this when she was 86. she did not pay taxes on it at that time planning on paying it at tax time I’m sure. She died shortly after. Is it my and my sister responsiblitily to pay the tax?

  161. Joe Says:

    Have it re-titled to “Name of dead father, deceased, for benefit of daughter name.” This is now a beneficiary IRA. So far, no taxes at all. Consult Pub 590 for how much you ‘must’ withdraw each year. Then use tax software to see how much you ‘can’ take out without paying tax on the full lump sum. You may only have to withdraw $1000 or so each year. I’m sorry for your loss.

  162. Joe Says:

    Unless you have an acceptable excuse for the RMD being late, the penalty was due.

  163. Joe Says:

    This is a tough one. If you were unaware of the income at the time, you’d have the money and not think twice. The fact that you know she failed to claim the income means if the IRS catches up to her (I mean her return, of course) you’ll be worrying about this for some time. The tax due can easily be $25000 depending on the rest of her income that year.

  164. Cindy Says:

    Question. My mother received my fathers IRA after he died in 1999. She put the IRA in her name and named me as beneficiary. In May 2007 mother remarried and recently passed away (2014). Her intentions all along were for me to receive the money. Does this money go to her second husband or me? Thank you.

  165. Joe Says:

    If you were the named beneficiary on the account, you simply go to the bank/broker and show a death certificate. The money is yours. Retirement account designated beneficiary takes priority over a will or intestate inheritance.

  166. Tanya Says:

    Bare with me I’m so Confused my stepdad passed 3 weeks before my mom her will plainly states me and my sisters to split, Her husband was benifiary but passed 3 weeks prior to her. Our Represenator of estate cashed the IRA and had it put in the estate account and is still there 27 months later, as we have one more Closeing on some other land,before the attorney says distribution will take place ? I am the youngest and I wanted my part rolled over I am the only one of my siblings with children left to care for there’s are grown, it’s really upset me And the Ira money was used for funerals Ect. Ect. Before the other property and other items were sold is our ira money part of the estate ? Shouldn’t we have already Recieved it? I felt like I had the right to roll it over but wasn’t asked they withheld the taxes before the put it on the estate account if it helps this is in oklahoma Again I’m really confused and feel that what was in the Ira down to the dollar should be split as stated clear by my mom, also the HEAVYNESS of wanting to make her proud and honor whAt for me is a huge blessing and gift she worked soooo Hard for :( THANK YOU I NEED HELP. ~ Tanya ~

  167. Anthony Delannoy Says:

    A non spousal beneficiary received her mother’s IRA. The beneficiary was not informed of the inherited IRA option cashed the check and now tried to invest with her mother’s company as a inherited IRA. The company denied and stated this could not be done due to check being cashed. Also sixty days were passed. Can she do anything to avoid tax implication?

  168. Joe Says:

    If I understand, the beneficiary on Mom’s IRA was her husband but he died before her. With no contingent beneficiary, the will takes over and the IRA is part of the probate estate. The lawyer/ estate executor was within the guidelines if this was the case.

    I write about this all the time, beneficiaries on these accounts are key. An IRA beneficiary goes to the broker and presents ID along with a death certificate, and the account is re-titled as a beneficiary IRA. No lawyer, no will, it’s pretty simple. Without a living designated beneficiary, this is the result.

  169. Joe Says:

    Unfortunately, I’m not aware of an exception for this situation. The best we can do is to keep educating people. This mistake is too common, and, in my opinion, any withdrawal request from an inherited IRA should first be answered with a brief letter describing the cost of doing this and the alternatives.

  170. Paul Says:

    Good day Joe,
    There are so many good questions on here already. I find myself more confused and then more informed as I read on. Here is my situation. I was one of 5 sibling listed as a beneficiary of a qualified IRA when my mom passed away in November. My mother was 79 years old. The local company holding the IRA said they would come meet with us at my moms house to discuss our options while we were all in town for the funeral. This is where your “Take a breath” comes into play. One of the options that was discussed was to take a one lump sum and then convert it into a beneficiary IRA. They said we would have 60 days to do so. We all chose that option and filled out the paperwork accordingly. A couple of weeks had passed, we received our checks and I notified my financial adviser that I had received the check and was looking to roll it into a beneficiary IRA. That was when I was notified that I was given some misinformation and that only spouses have the 60 day option. I was then informed that siblings have to transfer the money from company holding the IRA directly to the company in which I want to use for the beneficiary IRA, without ever cashing the check. i was instructed to send the check back without cashing and include a letter of intent to transfer the funds to a beneficiary IRA and that my company of choice will be sending them the proper transfer paperwork. I was informed to do this by the original company that my mom had the IRA with.
    Meanwhile I have sent the check back and I am waiting for the funds to be ready for my company to send the proper transfer paperwork. During this time I received a 1099 for the amount of the check.
    Since I received a 1099, am I going to have a big IRS problem going forward?
    Is there an amount of time allotted to transfer an IRA to a beneficiary IRA for a sibling. Such as 60 days?

    I apologize for the long rant and I await your reply!
    Thank you,

  171. Joe Says:

    As you’re discovered, the “take a one lump sum and then convert it into a beneficiary IRA,” may be an oversimplification. The company holding the IRA should have known better.
    If the IRA custodians don’t know the rules, what chance do any of us have? That’s my own rant.

    Since you didn’t take the money into your possession, the clock hasn’t started. The only started clock is that you must take an RMD this year. (Note, I trust that Mom took her 2014 RMD before she passed.) For now, you should get the 1099 retracted, hopefully before you need to fill out your tax return. Then you can proceed with the proper direct transfer for inherited IRAs.

    Once this is all done, you can run the numbers and see if you wish to take the minimum RMD each year or a larger number.
    Thank you for the visit. I am sorry for your loss.

  172. Debra Says:

    I am a little confused and this really blows my mind. But I am the only beneficiary of my mom’s IRA. I planned on using it to pay off her mortgage and sharing the rest of the money with the 3 others named in her will. Do you think that is possible? I live in Tennessee if that helps. I did plan on speaking with a CPA just in case but ALL help is grateful!

  173. Carol Says:

    Hi Joe, My brother died and left his IRA to our mother. However our mother died 7 years ago and my brother didn’t change the name of the beneficiary. My brother left a will leaving everything to myself and my other brother. What papers do we need for the financial instiution where the IRA is held and are we under the 5 year rule for taking the withdrawal.
    thank you for your help

  174. Julie Says:

    Here is a question I have: If mother made one of three siblings the designated beneficiary of her traditional IRA. She passed away and the one sibling decided to take a lump-sum distribution of the entire balance in the IRA. The beneficiary sibling is also the executor of the mother’s estate and determined that the mother would like for all of the children to receive a benefit of the IRA money. The sibling then divided the money up equally between all three of them. Each sibling reported their respective share of the taxable portion of the IRA. Can this division of income take place when only one sibling was the designated beneficiary?

  175. Joe Says:

    If the account were inherited the best way, it would have been via designated beneficiary through the paperwork on file with the broker. I’d contact the institution, and explain to them that your mom had already passed away, and ask what they need. It may be as simple as the two death certificates and a copy of the will. They may ask who the will’s executor is. And your state may require you to go through the probate process.

  176. Joe Says:

    If you were the designated beneficiary on her account, the money should be your’s and you will have to pay tax if you withdraw it. This is separate from the will, and doesn’t need to be split. If you refuse the inheritance, it can fall back into her estate, become part of the probate estate, and be split, each person paying their own tax, or going directly to pay off the mortgage, and being taxed to mom’s estate.

  177. Joe Says:

    If the designated beneficiary took the entire balance, she then owes the tax on the entire withdrawal. This was mishandled. She could have disclaimed 2/3 of her share and let it go to you two via the will, or regular inheritance.

  178. bert Says:

    Hi, my sister passed away on august 31, 2015 she named me beneficiary on her ira with wishes that her youngest son be taken care of. Its about 300k her husband doesn’t know about this and her oldest son thinks I should split it between them. Her youngest son has mental issues. now if I give the other son part of the money will I be responsible for taxes and is there any way her husband can take the ira from me?

  179. Joe Says:

    Hi Bert, sorry for your loss. A correctly filed beneficiary form on an IRA enables the IRA to bypass probate and any will. The will can say “everything I own goes to….” but that doesn’t affect the IRA, as it’s not part of the probate estate. You should bring a death certificate to the IRA custodian and request the account be titled as a beneficiary account, “name of sister, deceased, for benefit of bert, beneficiary.”

    $300K isn’t much to help someone for the rest of his life. I’d suggest you withdraw 4% (or RMD whichever is more) each year and spend it on the younger son. If you gift anyone more than $14K per year, there’s a gift tax form to file, but no tax due, just part of your lifetime exemption gets used up.

    I hope this helped.

  180. Mike Says:

    Wanted to get your take on this situation.

    My father passed away Feb. 28, 2015
    My sister passed away June 29,2015.
    There are three children.

    We three children are beneficiaries of my dads IRA.

    My sister who passed had assigned me and my other sister as her beneficiaries to avoid going through her estate. My mother left my father for another man and my father and my sister do not want her to get any of that money, that is why my sister assigned myself and other sister as beneficiaries.

    Our attorney and financial planner are saying that since my sister’s inherited IRA hasn’t “funded” yet, that it will most likely have to go through her estate. We are not sure what has taken so long, that is a question for the financial planner.

    We do not want this to go through her estate.

    Any thoughts?

    Thanks in advance.

  181. Joe Says:

    Since the account wasn’t changed to a beneficiary IRA, it seems to me that the attorney is correct. It’s an asset of your sister’s estate. Which means her will is the effective document to transfer this asset. As long as her will is clear, not too much harm is done. I do have a gripe with whoever is handling her affairs. As soon as dad passed, and a death certificate was available, his IRA should have been titled as a beneficiary IRA. 4 months is too long, in my opinion.

  182. Connie Says:

    What advise do you give when the deceased only names One of the children as 401k beneficiary and He wants to divide it between himself, sister and mother?

  183. Joe Says:

    If the administrator of the 401(k) will permit a partial disclaimer, if sister and mother are next of kin, or listed as beneficiaries on the will, they can inherit with a 5 year withdrawal period. If the admin won’t agree to this, I’d suggest taking the annual required withdrawal, paying the tax, and gifting 1/3 to each, mom and sis. It’s tough to make things right after the fact. It’s best to list as beneficiaries on the account.

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