With my previous article, I complete the section of my IRA Quick Reference Guide series of articles that describes the basic rules IRA owners must know and understand about IRA rollovers, transfers and withdrawals. In this article, I will reiterate some the applicable rules from the previous article by explain what IRA owners in these few specific situations should do to ensure that they handle their specific case with full adherence to the law.
My spouse died 3 years ago at age 48 and I inherited his IRA. I am older than he was and at the time of his death I elected to defer required minimum distributions on that IRA until he would have attained age 70.5. However, because my situation has changed, I need to access the money in his IRA. I am not yet 59.5. Can I withdraw from this inherited IRA without being subject to the 10% penalty?
Yes, you can. Because you did not roll over your spouse’s IRA into your own account, it is still exempt from the 10% penalty due to the death of the owner. The same would apply if you had elected to make annual minimum distributions – which you are in effect doing, but you are delaying the distribution for 20-plus years. However, had you not done this and had you rolled the inherited IRA into your own account, any withdrawals until you are at least age 59.5 – unless one of the other qualifying exemptions mentioned in the previous article apply – would be subject to the 10% early withdrawal penalty.
My mother, a widow, passed away in January of this year at age 82. Her IRA has named me and my two brothers as equal percent beneficiaries to her Traditional IRA (TIRA) – she does not have a RIRA. My mother’s TIRA is a combination of her TIRA and my father’s TIRA. He died two years earlier. I have gotten conflicting information on how to handle this from my brothers. The value of the TIRA is only about $70,000, so I do not think it is worth hiring an attorney or CPA to set this up for us. What would you recommend we do?
First, you will need to determine whether your mother has already taken her Required Minimum Distribution (RMD) for this year. Because she is past her Required Beginning Date (RBD), if she has not taken the RMD for the year of death, this must be removed first and distributed to beneficiaries who will then have to include this in their income for the year. The RMD amount may not be rolled over to an inherited TIRA. Next, the estate executor has to establish with the IRA custodian who the beneficiaries are and the percent to allocate to each beneficiary. The last step will be to set up individual inherited TIRA accounts for each of you and your two brothers, and then have the current custodian transfer one-third of the value of your mother’s TIRA to each of these inherited TIRAs and title each inherited IRA appropriately. The IRA custodian will know how to do this. Once the amounts are transferred, each beneficiary may then have the inherited TIRA transferred to the custodian of their choice. If the beneficiaries wish to do this, the transfer must be a direct agent-to-agent transfer.
After that transfer, each beneficiary can decide whether to take all of the money out of the inherited IRA, take out any portion of the funds or take out only the minimum required amount. Due to tax deferred nature of IRAs, if the beneficiary does not need the income immediately, it is generally better to leave the money in the IRA for as long as possible. If this is the case, then each beneficiary will have to begin taking minimum distributions each year – with the first year being the year following the year of death – over their life expectancy, which will be determined using the IRS life expectancy table in Appendix B, Table I of publication 590-B.
Are there any disadvantages of rolling over my deceased husband’s TIRA into mine and treating it as a single IRA titled only to me?
There are two possible disadvantages. If you need income from the IRA before you reach the age 59.5 and if you roll it into your own IRA, you will lose the death exception to the 10% penalty. Therefore, any elective withdrawals you take from the now single TIRA will be subject to the 10% early withdrawal penalty until you attain age 59.5, unless one of the other exceptions exists. The other possible disadvantage is that, if you are older than the deceased spouse, you would have to start RMDs sooner than if you would have left the IRA titled to the deceased spouse and waited until he or she would have reached age 70.5 before beginning RMDs from the IRA.
My husband died last month at age 63 and left his TIRA and his RIRA with me as the sole beneficiary. However, his profit sharing retirement plan is still with his employer. Can I have the profit sharing plan rolled over to my TIRA or must I take withdrawals from it?
For the qualified Profit Sharing plan – or any employer-sponsored retirement plan for which you as the spouse must be named beneficiary – you may elect to take RMDs directly from the plan. But, if you wish to combine it with your own TIRA, you should have it directly rolled over to your TIRA. Alternatively, you can do a direct Roth conversion from the retirement plan to your own RIRA – although the full amount of the conversion, minus any basis (past years after-tax contributions) , will be ordinary income to you for the year in which you make the conversion.
I inherited half of my deceased father’s TIRA two years ago and I just finished taking the second annual required distribution. Am I required to take this distribution in cash from the TIRA? Do I have any other option than cash?
No, you do not have to take the distribution in cash. You have another option. The IRS rule on withdrawal is only that the dollar equivalent of the RMD must be removed from the IRA by the end of the year. The IRS does not require the beneficiary to sell investments in the IRA to generate cash that equals the RMD amount, take out cash and go spend it. Most IRA custodians today will allow you to transfer “in-kind” shares of stock or mutual funds – whose value is at least as great as the RMD amount – into a taxable account. For example, let us assume that the TIRA has 500 shares of mutual fund XYZ and 200 shares of this fund has a market value equivalent to the year’s RMD. In this case, you could simply have these 200 shares transferred to a taxable brokerage account. The RMD requirement has been met and you will receive a form 1099-R showing this distribution amount. However, your investment allocation has not changed.
I hope that my answers to these few examples of real-life situations have shed some light on how to handle some of the situations you might encounter when dealing with withdrawals from inherited IRAs. As always, and because your situations might differ slightly from the examples in this article, consult a financial advisor whenever you are in doubt about your available options. This article is the last article that covered various aspects of IRA transfers, rollovers and withdrawals. In my next article, I will move on to the next topic and discuss the main taxation rules and few potential tax issues that you will encounter when managing your IRAs.
Bruce Miller is a certified financial planner (CFP) who also is the author of Retirement Investing for INCOME ONLY: How to invest for reliable income in Retirement ONLY from Dividends and IRA Quick Reference Guide.