Distribution from an inherited IRA

[Richard Anderson]

A person inherits an IRA from his parent. If the person rolls that IRA into an IRA in his name, what are the consequences? I think that that exemption from the 10% early penalty no longer applies. What else?

[Guest Mary Ann]

Only a spouse can roll an IRA into his/her own name. There are different rules for anyone else who inherits an IRA.

1) You must take it all out by the end of 5 years from 12/31 of the year following the year of death.

2) you can take it out over the life expectancy of the beneficiary with first distribution by 12/31 of the year following the year of death. If there is more than one beneficiary, the age of the oldest is used.

[Guest franky]

Just one note to previous reply. The five-year payout option is only available if original IRA owner died before required beginning date if IRA is traditional IRA.

[Richard Anderson]

Mary Ann,

Thanks for the reply. You say "Only a spouse can roll an IRA into his/her own name." Well it was rolled over into an IRA in his name. Does that mean that the entire "rollover" amount is taxable in the year that this "rollover" occurred?

Additional facts:

This was a traditional IRA and the original owner had been taking minimum distributions for several years. The original owner dies and son inherits. Son continues to take minimum distributions for two more years, then decides to move the IRA to a different broker. The original IRA is closed out with a check written to Son. Son then within a few days deposits this check into a "rollover" IRA that is in his name. Son's intention is to continue minimum distributions from this account. This "rollover" occurred early in 2000 and Son has not filed 2000 tax return yet.

[Guest Mary Ann]

Now that you have added more information, and have indicated that the IRA owner was beyond 70 1/2 and taking minimum reguired distributions, that changes things a bit. As noted above, the two choices I mentioned only work if required minimum distributions have NOT started. Once RMD's have started, the beneficiary must take distributions at least as rapidly as the original owner was taking them - or did the new law change that?

Unless the beneficiary can get the new company to correct the title of the IRA into his father's name with the beneficiary named as the son, I believe the entire amount would be taxable. Not only that, the funds would have to be withdrawn from the IRA as the son is not allowed that IRA.

Hopefully, someone will add their views.

[BPickerCPA]

Richard,

When the check was written to the son, that constituted a complete withdrawal of the account. His deposit into a new IRA is completely ILLEGAL, since rollovers are not allowed. The titling of the new account is IRRELEVANT, because the son did not do a trustee to trustee transfer, which is the only way a beneficiary can move an account from one custodian to another.

The son has to (a) pay tax on the entire amount of the withdrawal check, and (B) remove all the money from the rollover account, paying tax on any balance above and beyond the amount deposited into the account. Failure to take the money out will result in a 6% penalty. The income on the withdrawal is reported in any event.