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Frequent Contributor

Difference between an Inherited TIRA and a regular TIRA

My sister has an inherited IRA from her late husband, at Vanguard.  We are trying to transfer it to Firstrade and have run into a snag.  After 3 attempts, she either has to open up an inherited IRA at Firstrade OR move her Vanguard assets from an inherited IRA to a regular IRA (her own), THEN do the transfer.  That is, like account to like account.
 
I seem to recall that the ONLY difference it will make, as to whether she maintains the inherited IRA OR converts it to a regular traditional IRA is that, since her late husband was 9 years younger than she, whenever he died, she doesn’t have to start taking RMDs until HE would have been 70.5 (and my sister being 79 or so).  OTOH, ifn she converts, she has to start taking RMDs at HER 70.5.
 
Is this correct, or does she have to start taking RMDs at her age 70.5 (in a few years) regardless of whether its an inherited or regular TIRA?
ElLobo, de la casa de la toro caca grande
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Re: Difference between an Inherited TIRA and a regular TIRA

See Fido writeup,   https://www.fidelity.com/retirement-ira/inherited-ira/learn-about-your-choices

Option 2: Transfer your inherited assets to an Inherited IRA

You have the option of transferring the IRA or 401(k) assets you inherit from your spouse to an Inherited IRA. With an Inherited IRA, the amount of your required  minimum distributions (RMDs) will be based on your age and will be recalculated each year based on the factors in the IRS Single Life Expectancy Table.

The timing of the initial distribution may be based on your spouse's age at the time of his/her death. If your spouse was:

  • Older than age 70½, you must begin taking RMDs by December 31 of the year following your spouse's death.
  • Younger than 70½, you may be able to delay RMDs until your spouse would have turned 70½.

Transferring your assets to an Inherited IRA may be advantageous if you are not concerned about creditor protection issues and are:

  • Older than your spouse and your spouse died before age 70½, since this option would allow you to delay taking the RMDs until the year your spouse would have turned age 70½.
  • Younger than age 59½ and you need access to these assets immediately, since you would not be subject to a 10% early withdrawal penalty.
YBB
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Re: Difference between an Inherited TIRA and a regular TIRA

She already has the inherited IRA with Vanguard, so I think this is the situation she is in:

"Younger than 70½, you may be able to delay RMDs until your spouse would have turned 70½."

So, ifn she opens up an inherited IRA at Firstrade, she can 'preserve' this feature whenever she transfers the account from Vanguard to Firstrade.

OTOH, if she first 'moves' the inherited IRA assets to her regular IRA, also at Vanguard, she will be subject to regular RMD rules:

"the benefit of this option is that both the amount and the timing of required minimum distributions (RMDs) are based on your own age.*

So, if she then moves the account from Vanguard to Firstrade, she's start RMDs at her age 70.5, not her late husbands age 70.5.

Kinda what I thought.  Ifn Vanguard doesn't require any paperwork, that will be the most simple thing to do.  The RMD age difference isn't much to worry about in her financial situation.

Thanks, Yogi.

ElLobo, de la casa de la toro caca grande
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Re: Difference between an Inherited TIRA and a regular TIRA


@ElLobo wrote:
My sister has an inherited IRA from her late husband, at Vanguard.  We are trying to transfer it to Firstrade and have run into a snag.  After 3 attempts, she either has to open up an inherited IRA at Firstrade OR move her Vanguard assets from an inherited IRA to a regular IRA (her own), THEN do the transfer.  That is, like account to like account.
Yes. And it must be agent-to-agent....no 60 day rollovers. Each custodian can have slightly different wording, but if it remains an inherited IRA, the title of the inherited IRA will say something like " Joe Johnson IRA (deceased 1/8/2018) F/B/O Jill Johnson, Beneficiary” . I don't believe the title will designate her as the surviving spouse as the custodian would not know their marital status at death.
 
If the deceased spouse IRA is transferred into the surviving spouse's IRA, it will lose its identity of the original spousal owner and will simply be mixed in with the surviving spouses IRA dollars. If the surviving spouse did not have an IRA, at least per Fidelity (where my sister went through this when her husband died), the inherited IRA will remain titled 'inherited' but will not have the deceased spouse's name on the title of the IRA, although I'm sure this could vary between custodians.
 
I seem to recall that the ONLY difference it will make, as to whether she maintains the inherited IRA OR converts it to a regular traditional IRA is that, since her late husband was 9 years younger than she, whenever he died, she doesn’t have to start taking RMDs until HE would have been 70.5 (and my sister being 79 or so).  OTOH, ifn she converts, she has to start taking RMDs at HER 70.5.
 
Yes, that's right. This is important to a young widow (<59.5), who can leave it titled as an inherited IRA and take withdrawals from it only as needed without the 10% penalty but must begin RMDs when the deceased spouse would have attained 70.5.
 
Is this correct, or does she have to start taking RMDs at her age 70.5 (in a few years) regardless of whether its an inherited or regular TIRA?
 
As answered above. And a small correction to below. It is not whether he died prior to age 70.5, its whether he died prior to his Required Beginning Date, which is April 1 of the year following the year he attains age 70.5. If he died prior to his RBD, she has the added option of using the 5 year rule....something that rarely makes sense for a surviving spouse to use
 
BruceM

 

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Re: Difference between an Inherited TIRA and a regular TIRA

Thanks, Bruce.  It was interesting that Firstrade would not let her transfer her inherited IRA, at Vanguard, into her regular IRA, at Firstrade.  We tried twice, once online, once by sending in paperwork for the transfer.  The second time was when Firstrade said that she would have to open up an inherited IRA, at Firstrade, first OR transfer assets while still at Vanguard!  To open up an inherited IRA, at Firstrade, required death certificate, copy of drivers license, certified/notarized signature, and all that hoopla, even though Tim died 10 years ago.

So I logged onto Vanguard last night, and there was no way to do the asset transfer online.  So I called, talked with a rep, and she said all that was required (they had no official form for it) was a detailed letter, from my sister to Vanguard, telling them to transfer XXX shares of YYY from account #zzzzzzz to #aaaaaaa, and to list exactly all things that were going.  Since this is one of her accounts that holds all 20 individual stocks plus one ETN, the letter itself was very detailed.  She couldn't just say move everything!

The Vanguard rep said to send the letter to Vanguard or fax it in.  After I composed the letter, I went back online and couldn't find the fax number.  It just wasn't there, so I had to call Vanguard back to get it.  Turns out my sister doesn't have a fax, so she just sent the letter via regular mail.

Eventually, the assets will be transferred, at Vanguard, then we can do the electronic transfer from Vanguard to Firstrade.  In the mean time, still collect all diveys and distros.

ElLobo, de la casa de la toro caca grande
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Re: Difference between an Inherited TIRA and a regular TIRA

IMO it is reasonable for brokers/institutions to do asset transfers between similarly titled accounts. There is too much that can go wrong for transfers between dissimilar accounts. 

Some obvious exceptions include 401k/403b to TIRA/RIRA transfers. 

YBB
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Re: Difference between an Inherited TIRA and a regular TIRA


@yogibearbull wrote:

IMO it is reasonable for brokers/institutions to do asset transfers between similarly titled accounts. There is too much that can go wrong for transfers between dissimilar accounts. 

Some obvious exceptions include 401k/403b to TIRA/RIRA transfers. 


I'm not complaining.  It is what it is., and the paperwork is what it is.

We're doing this Vanguard to Firstrade transfer specifically because she holds a single 2X leveraged ETN in that account, along with the 20 individual stocks, and Vanguard doesn't allow her to reinvest the stock diveys back into the ETN as seed corn.

I started this Vanguard to Firstrade migration within a week after Vanguard's prohibition against the purchase of leveraged products went into effect.  I have 6 different accounts to move and we're doing 'em one account at a time.  Roughly 1 account per month.

ElLobo, de la casa de la toro caca grande
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Re: Difference between an Inherited TIRA and a regular TIRA


@yogibearbull wrote:

IMO it is reasonable for brokers/institutions to do asset transfers between similarly titled accounts. There is too much that can go wrong for transfers between dissimilar accounts. 

Some obvious exceptions include 401k/403b to TIRA/RIRA transfers. 


I've had situations where brokers/custodians ask me for "One & The Same" letters where I have to declare, and usually prove, that whatever name variants are on the account are the same.  

Titling gets especially messy for multiple decedents/guardianships etc.  We've got one tiny account where there's been two three deaths, a name change by marriage and it still confounds us since at the time of death - decades ago - the account was very small.  Now its a bit larger...and beyond the small estate exemption for our jurisdiction.  So I'm not sure exactly how to solve this, without getting expensive legal help.  

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Re: Difference between an Inherited TIRA and a regular TIRA

An inherited IRA remains titled in the name of the decedent with his or her Social Security number. This may be helpful if the beneficiary made nondeductible or after tax contributions to his or her IRA or converting to a Roth IRA, because the inherited IRA is not included in the calculation of total value of all IRAs when the beneficiary takes a distribution only from his or her IRA.

A beneficiary can still deduct federal estate tax, if any, during tax years he or she receives a distribution from an inherited IRA. This deduction is not as widely available now as the exempt or exclude amount has increased substantially. But I am guessing that many beneficiaries may not be aware that federal estate tax was paid on their inherit property.

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Re: Difference between an Inherited TIRA and a regular TIRA

Elsewhere in these forums some one made reference to advice from Choate, she is an Estate Planning consultant (she advises Estate Planners). She has a widely recommended book on Estate Planning. She also has a pdf titled "End the stretch IRA"  (do a search on Google for it). Particularly in the light of now pending legislation (both the House and the Senate) she points out the potential problems for heirs who inherit large IRA's, i.e. perhaps pushing them into much higher tax brackets because they may have to make many large withdrawals in a short time period. This document is not answering the question posed above but it could be important reading for anyone considering inherited IRA's and/or leaving IRA's to their heirs.

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Re: Difference between an Inherited TIRA and a regular TIRA

Bluebike 

when the IRA beneficiary is a non spouse the IRA is retitled as an inherited IRA in the name of the beneficiary with the bene’s SS number because the beneficiary is receiving the RMDs. Spouse under 70 1/2 who is sole IRA beneficiary can simply elect not to receive RMDs as the IRA beneficiary , treat the deceased’s spouse’s IRA as the spouse’s own IRA by designating the spouse as the owner or rolling it into the spouse’s own IRA or qualified  plan account. See IRS pub 590B p5.

Very few IRA beneficiaries are able to deduct estate tax paid on inherited IRA because the federal inheritance tax only applies to taxable estates over $11M (0.2%) and there is a 3 year statute of limitations to recover an overpayment of taxes.

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Re: Difference between an Inherited TIRA and a regular TIRA

IRS Publications 590-A at page 20 (2018) and 590-B at page 5 (2018) state:

 Inherited From Someone Other Than Spouse

If you inherit a traditional IRA from anyone other than your deceased spouse, you can’t treat the inherited IRA as your own. This means that you can’t make any contributions to the IRA. It also means you can’t roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.(emphasis added)

The federal estate tax exempt amount is $11.4 million for an individual who dies in 2019. The exempt amount doubled in 2018 but expires in 2025. But it has been lower, $1 million in 2003 and $675,000 in 2001. Some of those smaller estates included IRAs, which generate estate income, RMDs and other distributions that can be offset by the estate tax deduction.

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