Mistake 7: Not establishing the Inherited IRA properly.

Posted on by in Estate Planning, IRAs, Tax Law, The Lange Money Hour.

There are a number of rules that must be met in order to properly establish an Inherited IRA:

  1. Notification must be made to the custodian in writing.
  2. The first minimum distribution must be taken no later than December 31st of the year following the year the person passes away. Note: if the decedent was receiving lifetime RMDs, the beneficiaries must ensure the RMD has been taken for the year of death.
  3. The IRA must be retitled properly showing the following information (something that Jim has covered on the radio show more than once, due to the number of times mistakes are made on this key point):
    1. The decedent’s name, with “deceased” or “decedent” after the name.
    2. It must show that it is still an IRA.
  4. Retitling must be done by December 31st  after the year of death.

If these requirements are not met, then most beneficiaries will be faced with the following consequences:

  1. If the orginal account owner was RMD age or older, the IRA must be distributed over the owner’s remaining life expectancy, based on the single life table.
  2. If the orginal owner was under RMD age, the entire IRA account must be distributed no later than December 31st of the fifth year after the person passed away.
  3. If the account title is not worded properly the entire account could also be subject to immediate taxation all in one year!

Make sure you discuss all the vaious laws and titling issues with your advisor when establishing an inherited IRA.

Information adapted from MD Producer material