Inherited IRA question

[LostDollar]

@Tahoe Ray

Rereading thread. I intended my post above to be a response to OP, not to you. Trying to say you had already provided him the answer to his question, even when just the inherited IRA is considered. Rereading, I see I did not make clear who I was responding to. Apologies.

 

[MAnnuity]

Tahoe Ray - you mention same tax implications if moved to a non-annuity Inherited IRA account. (As well I understand the 10 year rule). Given the limited options noted on the carrier's form as noted before, any suggestions on how to actually facilitate such a transfer? Appreciate the insight.

 

[DoctorDu]

Assume parent's IRA was not also an inherited IRA (e.g. inherited by daughter's parent from daughter's grandparent). If it was, things even more complicated.

- Unless disabled, daughter is a non-eligible beneficiary, which means the 10 year rule applies (but see below), but not until she turns 21.

- However, she will have to take an RMD in the year following her parent's death if that is not the year she turns 21 (i.e. parent died 2024, RMD in 2025 based on daughter's age in 2025 and Single Life Table unless daughter turns 21 in 2025).

- If she does have to take an RMD in year following parent's death she will have to continue RMDs (based on Single Life Table) through the 10 year period (if it applies) because once RMDs begin they have to continue. This is true even though parent died before his/her Required Beginning Date of 2049 or thereabouts)

- There is an argument that an inherited IRA Annuity can continue beyond the 10 year period (see
[EXTERNAL LINK] - New RMD Regs Back Annuity-Based Stretch IRAs, Advisor Says | ThinkAdvisor).
If this fits the bill would ask the current carrier how they would handle the annuitization option operationally and tax-wise in light of the 10 year rule.

- If your client wanted to roll it to an investment account IRA she should elect the lump sum option and have it transferred directly to the trustee/custodian of the investment account IRA.

 

[LostDollar]

Assume parent's IRA was not also an inherited IRA (e.g. inherited by daughter's parent from daughter's grandparent). If it was, things even more complicated.

- Unless disabled, daughter is a non-eligible beneficiary, which means the 10 year rule applies (but see below), but not until she turns 21.

- However, she will have to take an RMD in the year following her parent's death if that is not the year she turns 21 (i.e. parent died 2024, RMD in 2025 based on daughter's age in 2025 and Single Life Table unless daughter turns 21 in 2025).

- If she does have to take an RMD in year following parent's death she will have to continue RMDs (based on Single Life Table) through the 10 year period (if it applies) because once RMDs begin they have to continue. This is true even though parent died before his/her Required Beginning Date of 2049 or thereabouts)

- There is an argument that an inherited IRA Annuity can continue beyond the 10 year period (see
[EXTERNAL LINK] - New RMD Regs Back Annuity-Based Stretch IRAs, Advisor Says | ThinkAdvisor).
If this fits the bill would ask the current carrier how they would handle the annuitization option operationally and tax-wise in light of the 10 year rule.

- If your client wanted to roll it to an investment account IRA she should elect the lump sum option and have it transferred directly to the trustee/custodian of the investment account IRA.

Caveat, NOT an agent.

But.....

Mom was only 50. If that means Mom had not yet started RMD's, doesn't that eliminate RMD requirement for OP's client, leaving only the requirement of emptying the account by the end the appropriate 10 year period?

I am not an agent or tax accountant.

In one way, it seems to me the tax answer is quite simple.
After OP's client has an Inherited IRA account set up for her (and assuming it is not Roth), any time she takes out money, she incurs a Federal, and possibly state, income tax obligation. And she should be looking at her other income and tax bracket and make estimate payments if necessary.

The challenge comes in determining the "right" times to take the income.

Further, if client has a job (earned income) and the inheritance is at least 100K, she has a wonderful opportunity to use the time value of money and repurpose her RMD's over the next 10 years into new IRA's for herself which she can draw upon in her 7o's. If she has enough inherited money, she can withdraw enough to pay income tax on the contribution too, and make the contributions as Roth contributions.

 

[LostDollar]

- If your client wanted to roll it to an investment account IRA she should elect the lump sum option and have it transferred directly to the trustee/custodian of the investment account IRA.

Or, based on OP's post, she could do the same thing with the current trustee/custodian. They can create that type of account for her too.
(That is what I have done and the process worked fine.)

 

[DoctorDu]

Responding to Lost Dollar:

Peculiarity in law requires a minor inherited IRA beneficiary to take RMDs per the old stretch rules until they reach majority, and once RMDs begin they must continue even though parent in this case hadn't reached her Required Beginning Date.

Regarding distribution options, not sure an IRA Annuity company could manage the inherited IRA except as another IRA Annuity (not investment account), and not sure what that would mean in context of 10 year rule. Hyperlink reference is to article suggesting that Secure Act 2.0 would allow annuity continuation beyond 10 years. Technically. But how does current carrier interpret it?

 

[LostDollar]

Responding to Lost Dollar:

Peculiarity in law requires a minor inherited IRA beneficiary to take RMDs per the old stretch rules until they reach majority, and once RMDs begin they must continue even though parent in this case hadn't reached her Required Beginning Date.

Regarding distribution options, not sure an IRA Annuity company could manage the inherited IRA except as another IRA Annuity (not investment account), and not sure what that would mean in context of 10 year rule. Hyperlink reference is to article suggesting that Secure Act 2.0 would allow annuity continuation beyond 10 years. Technically. But how does current carrier interpret it?

Ok, so now I am wiggling.

In this particular case, beneficiary was stated to be 20 when Mom died. But if RMD's were required, they would not be required until Dec 31 of the following year? Right? Beneficiary would be 21 (perhaps 22) at that time, guardian would have been removed from account, and RMD's have not yet started. So RMD's would not be required for Beneficiary?

 

[Tahoe Ray]

Tahoe Ray - you mention same tax implications if moved to a non-annuity Inherited IRA account. (As well I understand the 10 year rule). Given the limited options noted on the carrier's form as noted before, any suggestions on how to actually facilitate such a transfer? Appreciate the insight.

If you wanted to go the Schwab/Fidelity route, consult them as to the best way to handle it.

Normally, you'd set up the account first (as an inherited IRA) at the receiving custodian and let them request funds directly from the annuity company (as a death benefit).

There may be some like to like/ownership corrections (changing the name from Jane Smith to Jane Smith, deceased, inherited IRA FBO Sam Smith) that need to be addressed but the carrier will just NIGO those and then provide instructions.

That's the same way you'd do it as if you were choosing your 4th option (transferring to another annuity).

Let the other custodian request funds. That way, you don't have to risk re-entering surrender or even worse, having the beneficiary receive a check directly.