What rules should I be aware of when inheriting a previously inherited Traditional IRA?
My mother inherited her sister's Traditional IRA. The account was making distributions and my mother was old enough to continue receiving them. I am now the beneficiary of my mother's account, but I have not reached the minimum age for distributions. Are there different treatment, taxes, or rules of a a non-spousal Traditional IRA if someone inherits from a parent who had inherited the account themselves? Or are the rules the same as they were for the first transfer?
As the beneficiary of the account you are free to take withdrawals in any amount right away, and could distribute the entire amount if you wanted to. The IRS would be glad to tax all the remaining tax-deferred growth, and since the account has already done it's job of seeing your aunt through her lifetime, the age constraints for withdrawal are no longer an issue. What's more important is that you're aware that there could be an opportunity for you to leave funds in the account to continue to grow tax free.
If your aunt set her account up as a Stretch IRA, naming your mother as primary beneficiary and you as the contingent beneficiary, or if you were designated as your mom's successor beneficiary, it's possible you could limit your withdrawals to the Required Minimum Distributions (RMD) based on your mother's life expectancy. If she predeceased the IRS's RMD schedule set for her, you could still have time to defer the account's gains and withdraw funds gradually — allowing you to pay the tax gradually as well.
Because a Traditional IRA is a pre-tax account, the IRS is eager to finally have tax paid on the original deposits and gains. As the second beneficiary of the account, the clock is ticking faster on those funds to be distributed and ultimately taxed. Once you do make withdrawals they will be subject to regular income tax. If any non-deductibe contributions were made to the account by your aunt, then each distribution would be partially taxed and partially tax-free, mirroring the overall corresponding proportionality of the account.
You must follow the same distribution pattern your Mother set up as the original beneficiary. So whether your mother set up a 5 year distribution or based upon her life expectancy, you must follow the same pattern. Therefore, if it was based upon your Mom's life expectancy, you must continue based upon her life expectancy. So the distributions remain as your Mother set them up. The account titling will, however, change with your name as beneficiary and your Mother as decedent. You aunt's name as decedent will drop off.
Hope this helps and best of luck, Dan Stewart CFA®
An Inherited IRA can be handled a couple of different ways. Because the IRA was already making distributions, the beneficiary must also continue the distributions. I am going to assume the decedent, your Mother's Sister, was past age 70 ½ which would require annual minimum distributions (RMD.)
Your Mom can choose to continue those distributions based on her sister's life expectancy had she lived, or her own life expectancy. Potentially, taking the RMD based on the longest life expectancy will result in receiving more money over time, even though the amount will decrease annually.
Because you are the new beneficiary, if you Mom dies with a balance in the IRA, you will cointinue with those distributions. However you can choose to take distributions based on your life expectancy, which would reduce the taxable amount and allow for possibly more money over time.
Luckily I was able to check with Ed Slott (a real guru on these issues). As an Elite IRA Advisor, I wanted to chime on on this issue that does not get addressed very often.
When your mother inherited the IRA from her sister (your aunt), she should have created a Beneficiary IRA with both your aunt's and your mother's name Included in the titling of the IRA. More than likely your mother has been taking RMDs based on your mohter's life expectancy, but reardless you will need to ask the custodian.
As a beneficiary of your mother's inerited IRA, you will create a NEW inherited IRA account with both your Mom's name and your name included (your Aunt's name will drop off).
You will then have to continue the RMDs based on the same formula and table your mother was using for her RMDs. So you must continue your mohter's schedule by using the divisor that applied to son in the year of sons death and continuing to reduce that divisor by 1.0 for each year thereafter. The current custodian should be able to provide that for you. If your mother has NOT taken the RMD for the year of her death, that RMD also needs to be taken.
So here are the rules for you:
- You must take at least the RMDs each year and pay taxes on those distributions. If you miss one, there is a 50% penalty on the amount missed.
- You can take additional or even a full distribution regardless of your age and pay NO 10% penalty.
- You can NOT convert it into a Roth IRA (only allowed for spouses at the first death), and
- You can name your own new beneficiaries.
Two other points to check out with the custodian:
- See if there is any basis in the IRA (if your Aunt had any non-deductible deposits in the IRA if it was contributory). If that is the case, a portion may NOT be taxable to you.
- See if your Aunt paid Estate Taxes. If so, you could get a tax deduction related to the Estate Taxes Paid (called Income in Respect of Decedent for IRD).
Hope this helps!
It doesn't matter whether you have reached the distribution age or not; you are required to begin making distributions in the year following your mother's death. Since you are the second person to inherit the account, you must use what your mother's age would have been each calendar year to determine the percentage required to be distributed each year, since the distribution goes according to the first person to inherit. You can withdraw more than that amount but not less. You cannot roll the distribution into a Roth IRA.
If your mother did not take a distribution in the year of her passing then you are legally required to do so in the same amount (or more) as she would have done.
The main difference from being the first to inherit is that as the second (or third, or fourth, etc.) to inherit you must use the first person's distribution table from now on. If you were to die at any point while the account still exists, then the next to inherit must also continue to use what your mother's age would have been in continuing distributions until the account is finally emptied.