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Inheriting or Bequeathing an IRA

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the account or if the only beneficiary either pre-deceases or dies along with the account owner, the IRA funds must be withdrawn by the heirs within five years of the passing of the owner.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.

  • Joe March 11, 2014, 9:12 pm

    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.

  • Mary P April 6, 2014, 6:15 am

    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.

  • Mary P April 13, 2014, 5:59 am

    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.

  • Mary P April 13, 2014, 6:02 am

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

  • Ashley July 11, 2014, 1:52 am

    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?

  • Mary P July 20, 2014, 3:44 pm

    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?

  • Emily J July 30, 2014, 11:28 pm

    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!!

  • Joe July 31, 2014, 7:55 am

    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.

  • Emily J August 5, 2014, 2:28 am

    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!!

  • Mike August 7, 2014, 8:10 am

    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?

  • Joe August 12, 2014, 6:22 am

    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.

  • Joe August 12, 2014, 6:23 am

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

  • Joe August 12, 2014, 6:26 am

    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.

  • Cindy September 2, 2014, 7:02 pm

    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.

  • Joe September 6, 2014, 4:56 pm

    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.

  • Tanya October 4, 2014, 12:35 am

    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 ~

  • Anthony Delannoy October 14, 2014, 1:30 pm

    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?

  • Joe November 4, 2014, 9:41 am

    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.

  • Joe November 12, 2014, 9:10 am

    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.

  • Paul January 17, 2015, 12:23 pm

    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,

  • Joe January 18, 2015, 3:21 pm

    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.

  • Debra March 17, 2015, 11:43 am

    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!

  • Carol May 17, 2015, 3:57 am

    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

  • Julie May 22, 2015, 7:36 am

    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?

  • Joe May 23, 2015, 11:34 am

    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.

  • Joe May 23, 2015, 11:37 am

    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.

  • Joe July 8, 2015, 5:46 pm

    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.

  • bert September 12, 2015, 3:34 pm

    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?

  • Joe September 13, 2015, 3:40 pm

    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.

  • Mike September 19, 2015, 9:58 pm

    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.

  • Joe September 21, 2015, 10:34 pm

    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.

  • Connie October 22, 2015, 2:03 pm

    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?

  • Joe October 23, 2015, 8:26 pm

    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.

  • Amy May 7, 2016, 2:26 pm

    I have a question my mom passed and had 112,000 in her ira, it gets split between two children what is the best way to have the money disbursed , so I don’t get killed with taxes

  • Joe June 30, 2016, 7:33 am

    The account can be split in two, and both accounts retitled, “Mom’s Name, Deceased, for benefit of child name”. Then you are each required to start RMDs next year.

  • marian January 17, 2017, 12:45 pm

    mom died I was the beneficiary of IRA but didn’t sign for it. Bank never contacted me. I receieved a thing from irs that I did not file the 1099. Had to pay taxes and bank wont talk. Brother went and cashed it and I got stuck with taxes

  • Joe January 17, 2017, 4:37 pm

    I’m sorry to hear this. If the bank gave your brother the money, they should have 1099’d him not you. More than that, I don’t know what to tell you, family issues like this are tough.

  • Alan January 29, 2017, 5:01 pm

    Hello Joe.
    Interesting situation. My wife’s mother passed recently and left her IRA to my wife and her three siblings. Wife’s father a) doesn’t remember signing any paperwork approving such a bequeath, and b) is extremely hurt and upset. All siblings are in 100% agreement that IRA should revert to father and not the children. Is there a way to accomplish that satisfies the will and and the desires of the children at the same time?

    Thank you!

  • Joe January 30, 2017, 5:38 am

    I am sorry for you family’s loss. First, your father in law did not need to sign anything. IRA beneficiary designation choice doesn’t require any spousal consent. (Note – 401(k) and similar company sponsored account do require spousal consent for non-spouse beneficiaries). This is why it’s so important to review these choices each year.

    Since the husband is the next of kin, the 4 children should sign a letter to the IRA holder (bank or broker), have all 4 signatures notarized, and declare that they are disclaiming the money. It should then revert to the husband. Before officially handing that letter over, verify with the IRA custodian that they will follow this request, and not send the account thru probate.

    Alternately, and a worse choice, in my opinion, is to divide the account up among the 4 kids, and have them gift the withdrawals each year. This keeps the funds in their name, tax due their responsibility, but when dad passes, no new issues.

  • Karlene Carper February 20, 2017, 2:16 pm

    My father recently passed and left an IRA annuity to his 4 daughters as Co-beneficiaries. He selected the stretch IRA option when he set this up. There is about $122,000 to be divided 4 ways and we don’t want the stretch option. We want a lump sum pay out. We are being told it cannot be changed. Is there a law that would allow us to change the distribution method?

  • Joe February 22, 2017, 2:28 pm

    An annuity inside a tax deferred account such as an IRA boarders on criminal. The industry was making great strides to actually make these illegal, but the current administration is heading in a different direction, to the “buyer-beware” rule for investors. The choice for this product may very well be irreversible, I’m sorry to say.

    The annuity itself has a set of rules under which it was sold to your father. He may very well have been convinced that this was somehow the right thing to do, to provide the 4 of you with a small annual payment each year instead of the lump sum.

  • Karlene February 22, 2017, 4:01 pm

    Will you explain the statement made about the IRA inside an annuity boarding on criminal? I don’t know much about these things and we do think that our dad was possibly misled.

  • Joe February 22, 2017, 9:39 pm

    By definition, an IRA is a tax advantaged account. Annuities typically have a high expense, I’ve see annual expenses up to 3% per year. Part of the sales pitch is that there’s a tax benefit inherent to the annuity product. But, there’s no need for that benefit, as the IRA is already tax favored. Annuities in Your IRA – Bad Choice is one article supporting my view. To be fair, there are some whom I respect that disagree with me, focusing on other benefits. In the end, it all come down to when, why, and how this was sold to him.

  • Connie May 21, 2017, 5:48 pm

    My stepfather died Oct. 2013. He had both an IRA Roth and Traditional account. He made his wife, my mother the primary beneficiary. She predeceased him by two years. I was named the secondary beneficiary (100%). The woman who was the estate in trust administrator/personal representative was a con artist who brought a lawyer into my terminally ill step-father’s hospital room and had him sign a new will/trust that left his estate to her. Now it is May 2017 and I just received a note from her simply stating, “Take care of this.” Enclosed were a partial 1st quarter 2017 statement of these IRA’s that had noted my name as secondary beneficiary. This is my first and only notification over 3 1/2 years after his death. She kept it from me. I submitted my mother’s death certificate and my beneficiary proof of identity. The Trust Co. told me that she did not provide my step father’s death certificate until February 2017, when she tried to cash out the IRA’s (they denied her). I fear she has been cashing his quarterly checks from this Trust Co! He was 85 when he died. Where do I begin? I will NOT cash these out. What authority do I report this to? What implications are there for me because I was just told. What is her culpability for withholding the information from me and the Trust Co. for 3+ years? I have requested the quarterly statements from the Trust Co. dating back to his 2013 death. She devastated the family, and now there is more!

  • Joe May 28, 2017, 8:00 am

    I am so sorry to hear this story. I don’t even know where to start. If the money was significant, it’s time to get a lawyer and try to go after what was yours. Unfortunately, this is a legal matter.

    What I can tell you is that IRAs do not follow the wishes of the will if there was a proper beneficiary designation noted. To be clear, if the IRA account listed a beneficiary, that takes precedent over any will. And the IRA custodian should have honored that paperwork. I wish you well.

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