Inherited IRAs Flashcards
What rules govern RMDs from an inherited IRA for a spouse?
Spouses have two options. 1.) they keep it as an Inherited IRA, in which case RMDs must begin when deceased spouse would turned 70 1/2, or 2.) they can roll over the deceased spouses IRA into their own IRA, and then take RMDs when they reach 70 1/2.
Note that if the beneficiary spouse is less than 59 1/2, and may need access to the money soon, it’s better to take as an Inherited IRA because distributions will not be subject to the 10% early withdrawal penalty.
Is it possible to execute a Roth conversion of an inherited IRA?
No. Inherited IRAs can’t be converted. However if the original owner is in a low tax bracket, the heir who is in a higher bracket could gift money to the owner to pay the taxes on a conversion. The owner would benefit, and would not have make RMDs. The heir would benefit by the tax rate arbitrage.
What rules govern RMDs for an inherited IRA for a non-spouse?
The beneficiary must start age based withdrawals by December 31st of the year after the year the IRA is inherited.
This is true of both traditional and Roth IRAs.
What happens if an estate is named as beneficiary of an IRA?
RMDs must start after a short period of time, and full distribution also occurs quickly. This is why it’s almost never advisable to name an estate as beneficiary of a retirement account.
Note - Here is the term estate is distinct from a trust, which is has different rules for distributing IRAs left to one or more beneficiaries.
T or F - Inherited IRAs cannot be converted to Roth status.
True. Roth conversions are not allowed for inherited IRAs.
T or F
Inherited IRAs from different decedent can be consolidated.
False. Inherited IRAs from different decedents must be kept separate. They also cannot be consolidated with regular IRAs.
T or F
Inherited IRAs can be consolidated with regular IRAs
False. An inherited IRAs cannot be combined with any other IRA (traditional or inherited)
Which of the following applies in the year of the decedent’s death IF they have not yet taken their annual RMD before the time they die:
- Beneficiary must take the RMD by 12/31 of the year of death that the owner would have been required to take
- If more than one beneficiary, then they must proportionally take the owners RMD by 12/31 of the year of death
- In the above scenarios, the beneficiary(ies) must pay the tax on the RMDs they receive at their own tax rate.
- The decedent’s estate must take the owner’s RMD and pay tax at the owner’s tax rate
1 through 3 apply. 4 is false.
What are the four IRS rules for a “Qualified Trust” for purposes of RMD planning for an inherited IRA?
The trust must be irrevocable or become irrevocable upon the IRA owner’s death.
The trust must be valid under state law.
Beneficiaries are identifiable in the trust document.
The custodian must be provided a copy of the trust document or a list of the trust’s beneficiaries and conditions by October 31 of the year after the year of the IRA owner’s death.
What is the logic behind the prohibition against consolidating inherited IRAs with regular IRAs, or with other inherited IRAs received from a different decedent?
How does this logic also apply to the prohibition against Roth conversions of inherited IRAs?
Inherited IRAs are subject to RMD rules that are meant to prevent permanent or near permanent deferral of taxes. Keeping inherited IRAs separate from regular IRAs, or from inherited IRAs from other decedent’s, helps assure that the inherited money is paid out, and therefore taxed, according to the RMDs rules as they apply to each inherited IRA account.
With regard to Roth IRAs and conversions, the government does not want tax-free Roth account monies to compound indefinitely tax free (this is why inherited Roth IRAs are subject to the same RMD rules as inherited traditional IRAs). Allowing Roth conversions on inherited traditional IRAs would subvert this intent.
T or F
Inherited Roth IRA’s are subject to RMDs under the same rules that govern inherited traditional IRAs.
True
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