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Non-Spouse Rollover of Inherited IRA or Plan

750-year-old-gija-jumulia-by-sridgwayWhen you inherit an IRA from someone other than your spouse, you are able to take advantage of certain protections or deferrals of tax inherent in the IRA, but you are somewhat restricted in your actions with the account.  These non-spouse rollover rules also apply to a spouse who has elected NOT to treat the inherited IRA as his own IRA.

Other than the trustee-to-trustee transfer, an inherited IRA is not permitted to be rolled over – in other words, a non-spouse rollover (the 60-day variety) is not allowed.

Restrictions

First of all, you are not allowed to treat the IRA as your own – in other words, the account can only be re-titled as an inherited IRA.  This means that you can move the account to another custodian (via trustee-to-trustee transfer only) or leave it at the same custodian, and change the title to read as “John Doe IRA (Deceased January 1, 2009) FBO Janie Brown” or something very similar.

In addition to the restriction on titling, the IRA beneficiary must begin taking Required Minimum Distributions (RMD) as described below:

  • If the owner of the account died on or after his Required Beginning Date, which is generally April 1 of the year following the year in which he reached age 70½, the RMD is based on the longer of: 1) the owner’s life expectancy¹; 2) the beneficiary’s life expectancy¹; 3) the oldest of multiple beneficiaries’ life expectancy¹ (if there are more than one beneficiary).
  • If the owner of the account died before his Required Beginning Date, the RMD is based upon the beneficiary’s life expectancy¹ or the life expectancy¹ of the oldest beneficiary if there are more than one beneficiary.

The Designated Beneficiary

The designated beneficiary is a specifically-named individual (or individuals, if more than one beneficiary is to inherit the account). The designated beneficiary is determined on September 30 of the year following the year of the death of the plan owner.  In order to be named the designated beneficiary, an individual must be named on the plan documents as of the date of death (no changes can be made after death).  If any person named in the plan documents as beneficiary but is no longer a beneficiary as of September 30 of the year following the year of death, that person will not be considered when determining the designated beneficiary.  This could come about if one of the original beneficiaries chose to disclaim entitlement to the account.

If an individual who is a beneficiary as of the owner’s date of death dies prior to September 30 of the year following the year of death, that individual is still considered to be the beneficiary, rather than any contingent beneficiaries.  The deceased beneficiary’s estate would receive the account and her age would be used for determining distribution.

Required Minimum Distribution (RMD) Rules

It is important to note, the following RMD rules apply:

  • you’re allowed to spread the distribution out in monthly, quarterly, or any schedule of payments as long as it’s at least annually;
  • if you’re the beneficiary of more than one IRA, you must determine the RMD and withdraw it from each inherited IRA individually; as well as
  • if you receive more than the minimum required in any one year, you do not receive “credit” against future distribution requirements.

Multiple Beneficiaries

If there are multiple beneficiaries of a single account, and all of the beneficiaries are individuals (not trusts), as indicated earlier, the beneficiary with the shortest life expectancy¹ is used to determine RMD for the account.  If an account is split into separate accounts with separate beneficiaries prior to the September 30 deadline in the year following the death of the owner, each account is treated separately with regard to inheritance rules, not aggregated.

Trust as a Beneficiary

If a trust is the named beneficiary, on September 30 of the year following the year of the death of the owner, the beneficiary(s) of the trust will become the designated beneficiary(s) of the IRA as long as the following are true:

  1. The trust is a valid trust under estate law, or would be but for the fact that there is no corpus.
  2. The trust is irrevocable or will become irrevocable by terms, upon the death of the owner.
  3. The beneficiary(s) of the trust are specifically identified from the trust document.
  4. The IRA custodian or trustee has received documentation of the trust by October 31 of the year following the year of the owner’s death.

If the beneficiary of the trust is another trust, as long as the second trust meets the requirements above, the beneficiary(s) of the second (or subsequent) trust will become the designated beneficiary(s) of the IRA. The four points above are a definition of a See-Through Trust (or Look-Through Trust), which is the only valid type of trust that can be a beneficiary of an IRA and allow the trust beneficiary(s) to defer distribution beyond the default five-year distribution period. 

Footnotes:

¹ Life expectency is generally determined in these cases by the IRS Single Life Table, also known as Table I, which you can find by clicking this link.

Photo by sridgway

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