What’s in a Name? Preserving an Inherited IRA

An IRA can be a smart asset to transfer to your spouse and to others upon your death. It can provide tax-deferred or tax-free growth. The IRS is particular about the transfers and an error is made, the benefits can be lost. Here is a list of dos and donts:

  • Don’t transfer an inherited IRA into your own IRA unless you inherit it from your spouse.
  • Leave a copy of your IRA beneficiary designation form with your papers. Do not trust the entity holding the IRA to have a copy.
  • Designate a beneficiary and a successor beneficiary. If the IRA passes through a probate estate most benefits are lost.
  • Here’s the “What’s in a name” part: When you receive the IRA, it must be re-titled correctly such as “John Doe, IRA, deceased 2/25/12 F/B/O (for benefit of) Sally Doe, beneficiary.” A custodian might make a change from this exact title but be sure that they know what they are doing. An incorrect designation can have drastic tax consequences. The key is to make sure that the custodian understands that this is an inherited IRA and that they are aware of how to establish an inherited IRA account.
  • When you inherit it, and if the donor was older than 70 ½ , make sure that the donor took all annual RMDs (required minimum distributions) including the year of death. If not, you must pay the RMD by year-end.
  • If you do not need the money or do not want the asset in your name (for various reasons) consider a disclaimer in favor of a contingent beneficiary.
  • If you change custodians, transfer the asset from “trustee to trustee” rather than to you and then to the new trustee. The rules are not the same as they are for a transfer by you of your own IRA such as the 60 day window to transfer rule.
  • Keep the inherited IRA separate always. Do not add to it.
  • Make annual withdrawals from the inherited IRA even if you are not yet 70 ½. This applies to Roth IRAs also.
    Call your CPA!

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