Risks of a Mistitled Inherited IRA?

[JoeBialy]

There is plenty of great advice on here and the web about how to properly title an inherited IRA. My Q is: What are the risks/consequences if that titling is somewhat incorrect? 

 

Longer version: My mother passed away a few years ago and left me a Roth IRA, which I kept at her old brokerage. I have been diligent about RMDs and other legal formalities, but would now like to do a trustee-to-trustee transfer of the Inherited IRA to my current brokerage.

 

Unfortunately, my current brokerage does not seem to be titling their inherited IRAs correctly. They are titling them as "[Client Name] of the Roth IRA of [Deceased Name], Brokerage LLC." For example: 'John Smith of the Roth IRA of Sarah Smith, Brokerage LLC.'

 

This is sort of close, but still seems plainly out of compliance with the experts recommend, which derives from IRS Notice 2007-7 and its requirement of a clear specification of beneficiary and decedent:

 

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A-13. The IRA must be established in a manner that identifies it as an IRA with respect to a deceased individual and also identifies the deceased individual and the beneficiary, for example, “Tom Smith as beneficiary of John Smith.” 

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Not being a tax lawyer or CPA, I don't know what risks are created if I just accept the new brokerage titling scheme and complete the transfer. Is their titling scheme "close enough," or could it create real headaches? Is the IRS going to blow up my IRA when they see the 1099-R and claim I've lost the stretch rights?

 

The brokerage basically told me they're aware of the issue, but won't be able to fix it anytime soon.

 

And unfortunately, I really need to consolidate things at that particular brokerage, so finding a different brokerage is not particularly viable. Thanks for any thoughts!

[Bird]

I don't think the titling itself is going to blow anything up, as long as it is coded properly in their system and you maintain the RMDs.  The wording you describe is perhaps a bit awkward but I think it gets the message across ok.

Nothing official/just my two cents.

[card]

No specific language is required. One concern is that IRA owners be able to identify the source of their IRAs so that they keep inherited IRA funds separate from their own personal IRAs. Another concern is ensuring that the inherited IRA trustee to trustee transfer is recognized (and nontaxable). Per the IRS:

"However, the beneficiary 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 the beneficiary." (The source of this isn't Notice 2007-7, which dealt only with transfers from qualified plans to IRAs, but Rev Rev 78-406 and several subsequent private letter rulings which held that IRA to IRA transfers, including inherited IRAs, are not distributions or rollovers.)

Your broker's language doesn't even make literal sense, as it seems to have a word missing (presumably "beneficiary") before "of." As Bird suggests, the language is unlikely to invalidate the transfer, as the prior owner is identified, and you have no control over the new broker's titling protocol (if you have anything in writing from them, keep it.) But clearly it would be "better" if they added the word "beneficiary."

One other point. You shouldn't get a 1099R from your current broker for this transaction. IRA to IRA transfers generally aren't reportable events if you're not getting any cash. And they aren't reportable by the new broker on Form 5498 either. So the only reportable event will likely be a 1099R when you take the money out of the inherited IRA, and by then maybe your new broker will have fixed its titling problem.

Curious about why you "really need" to consolidate this IRA with the new broker...