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Warning to IRA Beneficiaries

July 24, 2012
IRAs are widely held and popular accounts yet they are fraught with tax compliance dangers.  One danger is when IRA beneficiaries inherit an IRA and they – or their custodians – do the wrong thing. 
 
When an IRA is inherited beneficiaries should not change the names on the account; and should not take, deposit or receive ANY distributions without getting professional advice.  Doing the wrong thing could make the entire IRA taxable in the year or 5 years following the IRA owner’s death instead of having the distributions stretched out and taxed over much longer periods.
 
The account name should be kept in the name of the deceased IRA owner with the beneficiary’s name added as follows:
 
John Smith, deceased (date of death, September 4, 2012), for benefit of Susan Brown [designated beneficiary] (soc. sec. # 123-45-6789), beneficiary.
 
If done right, distributions could be made over the remaining life expectancy of the beneficiary if the IRA owner’s death occurred before their required beginning date – or – the distributions can be made based upon the withdrawal rate in effect during the owner’s lifetime if death occurred after the required beginning date.
 
A spouse still has the right to roll over the funds into their own IRA.  If the name is changed to the surviving spouse’s name, it is deemed a spousal rollover and will not be taxed at that time.  IRAs cannot be rolled over to a non-spouse beneficiary.
 
IRA owners should leave instructions to beneficiaries warning them to refrain from doing anything with an inherited IRA, 401k, 403b or pension before speaking to a knowledgeable tax advisor.
2 Comments leave one →
  1. Ira & Diane permalink
    July 25, 2012 12:12 am

    This is great advice, I immediately sent it to my daughter. Kudos to Ed for enlightening me on this topic

  2. July 27, 2012 12:30 am

    Thank you for kind comments.

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