Question on inheriting cash assets from an IRA

[pcumming]

Question on inheriting cash assets from an IRA

A parent recently passed away. I have no other living parent.

The estate is less than the unified credit so we are in good shape.

There is no real property. Only property (stocks, funds) are in a trust and they have recently been liquidated to cash. All accounts except 1 are Brokerage accounts and the beneficiary is the trust.

The only issue I have is that there is an IRA and I am the beneficiary-not the trust. The assets (stocks, funds) in the IRA have also been sold and are in cash in the IRA.

I am a non spouse inheritor. The parent did begin taking the minimum required distributions from this IRA years ago.

We have an Estate lawyer and we have a CPA who will take care of things. However I would like a 2nd opinion on something.

Person passed away at end of 2007 and did take all required distributions from the IRA for the year.

The IRA and other accounts will be taxed as part of the 1040 for 2007 and 1041 for 2008...(for the decedents estate).

Question: Is there a way for me to avoid any further taxes (as a beneficiary) on the IRA?

**I have read about setting up an inherited IRA, also read that that perhaps I can take a lump sum distribution and have it all taxed as ordinary income, or take an annual MRD distribution over MY life expectancy or take a distribution of all money within 5 years...

GOAL:

My goal is to somehow avoid the double taxation on this IRA since taxes will be paid once by my parents estate. (The parent who died was the last surviving parent).

----Or are my only options as indicated above (see *)?



Thank you very much

Peter

[Kram BergGold]

Here some help

First you can't do averaging on an IRA distribtuion. Averaging only applioes to qualified plans like a Keogh.
As no estate tax is due there is no double taxation of the IRA. If there were, there is a way to recover the double tax.
The rules for a non spouse who inherits an IRA are very specific. I sugggest you read page 204 in Lasser's Tax Guide.

[pcumming]

Thanks, I could read page 204 of suggested guide if I had the book. Perhaps it is online.

In essence are you saying I need to set up an Inherited IRA?

Thanks
Peter

[joanmcq]

Yes, the only thing you can do is set up an inherited IRA. If your parent passed in 2007 there is no income for 2008 because, as beneficiary, the IRA passes straight to you as of DOD. Nothing from the IRA will go on the 1041. You do need to keep it titled as a beneficiary IRA and must take RMDs based on your age. You can take out more, and regardless of what you take out, it will be taxed as ordinary income, unless your parent had any basis in the IRA.

[pcumming]

Thanks. A great and informative reply.

Appreciate it
Peter

[Roland Slugg]

A possible clarification

Dear pcumming

I'd like to offer possible clarification to two of the comments above:

In your original post you stated: "The IRA and other accounts will be taxed as part of the 1040 for 2007 and 1041 for 2008...(for the decedents estate)."

The part about the IRA is not correct. The IRA distribution your parent received in 2007 before he/she died will be taxable on his 2007 income tax return, F-1040, but no distributions from that IRA will be taxable on F-1041. Subsequent distributions will be taxable to you, on your own tax returns. Joanmcq correctly points this out as well.

Joanmcq's reply may be a bit misleading where she says, "... there is no income for 2008 ... ." I'm sure she means there will be no income taxable to your deceased parent or the trust in 2008. However, YOU will need to take your first distribution in 2008 (unless you decide to wait until as late as 2012 and withdraw the entire balance in that year or an earlier one).

If you wish to read more, a good and readily available reference source is the IRS's publication on the issue of IRAs. Click here ... http://www.irs.ustreas.gov/formspubs/index.html
... then "Publications", then Pub. 590. The relevant parts for you start on p.20/21 then jump to p.34 and p.36. Be sure to read the Example near the top of the right-hand column on p.37, as it is exactly on point in your case.

Please note that once your 2008 life expectancy number is determined, via Table 1, that it gets reduced by 1.0 each year thereafter. This is different from the annual life-expectancy recalculation that a living IRA contributor is allowed to make.

Just out of curiosity, is your other CPA and/or attorney telling you something different from the above?

[Gene V]

Roland Said:
YOU will need to take your first distribution in 2008 (unless you decide to wait until as late as 2012 and withdraw the entire balance in that year or an earlier one).

I believe this election is only available when the participant dies before the date RMD begins.

TTB 13-24

[Roland Slugg]

5-year rule

That's not correct, Gene. The 5-year rule is available to all named individual beneficiaries. A 5-year payout is only mandatory when the beneficiary is not an individual (e.g. estate or trust) and the IRA owner dies before reaching his "starting date."

Admittedly, IRS Pub. 590 isn't very clear on this. The rules are spread out over several pages and you have to look in several places to find them. In addition to the places I cited, also see "5-year rule" on p.38. The Q&As in the Regs are also helpful.

[Gene V]

I guess I don't understand what TTB means by the following paragraph
page 13-24

2) If the beneficiary is an individual, the beneficiary can elect to
take the entire account balance in the IRA by the end of the
fifth year following the year of the participant’s death. No distributions
need to be made before the end of the fifth year.
This election is only available when the participant dies before
the date RMD begins.

[Roland Slugg]

I don't have TTB, but the portion you quoted seems to contradict the Regs and IRS Pub 590. Pub 590 has this example on p.37:

Example. Your father died in 2007. You are the designated beneficiary of your father’s traditional IRA. You are 53 years old in 2008. You use Table I and see that your life expectancy in 2008 is 31.4. If the IRA was worth $100,000 at the end of 2007, your required minimum distribution for 2008 is $3,185 ($100,000 ÷ 31.4). If the value of the IRA at the end of 2008 was again $100,000, your required minimum distribution for 2009 would be $3,289 ($100,000 ÷ 30.4). Instead of taking yearly distributions, you could choose to take the entire distribution in 2012 or earlier.

And on p.38 it says this:

5-year rule. If you are an individual, you can elect to take the entire account by the end of the fifth year following the year of the owner’s death. If you make this election, do not use a table.

Maybe another participant can shed some light on this apparent conflict ... perhaps even someone from TMI/TTB.

[Bees Knees]

The pub is misleading.

I don't have TTB, but the portion you quoted seems to contradict the Regs and IRS Pub 590. Pub 590 has this example on p.37:

Example. Your father died in 2007. You are the designated beneficiary of your father’s traditional IRA. You are 53 years old in 2008. You use Table I and see that your life expectancy in 2008 is 31.4. If the IRA was worth $100,000 at the end of 2007, your required minimum distribution for 2008 is $3,185 ($100,000 ÷ 31.4). If the value of the IRA at the end of 2008 was again $100,000, your required minimum distribution for 2009 would be $3,289 ($100,000 ÷ 30.4). Instead of taking yearly distributions, you could choose to take the entire distribution in 2012 or earlier.

And on p.38 it says this:

5-year rule. If you are an individual, you can elect to take the entire account by the end of the fifth year following the year of the owner’s death. If you make this election, do not use a table.

Maybe another participant can shed some light on this apparent conflict ... perhaps even someone from TMI/TTB.

The pub is misleading.


IRC Section 401(a)(9)(B)(i) says:

“Where distributions have begun under subparagraph (A)(ii), A trust shall not constitute a qualified trust under this section unless the plan provides that if –

(I) the distribution of the employee’s interest has begun in accordance with subparagraph (A)(ii), and
(II) the employee dies before his entire interest has been distributed to him,

the remaining portion of such interest will be distributed at least as rapidly as under the method of distributions being used under subparagraph (A)(ii) as of the date of his death.”

IRC Section 401(a)(9)(B)(ii) says:

“5-year rule for other cases. A trust shall not constitute a qualified trust under this section unless the plan provides that, if an employee dies before the distribution of the employee’s interest has begun in accordance with subparagraph (A)(ii), the entire interest of the employee will be distributed within 5 years after the death of such employee.”

The code goes on to explain the exceptions to the 5 year rule which basically allow for the payout over the beneficiary’s life or the decedent’s life under those rules.

Note that the 5-year rule is only mentioned in the context of required distributions before the employee’s RMD has begun. It is actually a requirement, with the option to pay out over the life tables available as an exception to the 5-year rule.

Reg. Sec. 1.408-8 Q-1 says an IRA is subject to the distribution rules provided in IRC Section 401(a)(9).

The regulations also mention the 5-year rule in the context of plans where the decedent dies before the year in which RMD begins.

For example, “§ 1.401(a)(9)–3 Death before required beginning date” mentions the 5 year rule in the context of death before RMD begins.

Thus the 5-year rule can only be applied if the decedent dies before RMD begins. The IRS Pub is confusing in this matter.

[Roland Slugg]

Pub misleading? Or just plain wrong?

I completely agree that the Code and Regs are very clear regarding the 5-year rule ... i.e. that it may only be elected if the account owner dies before reaching his "required beginning date."

But there is nothing "misleading" about the example on p.37 in Pub. 590, the last sentence of which clearly implies that the 53-yo beneficiary can elect to use the 5-year rule. And it's highly unlikely that the father of a 53-yo would have been less than 70½ when he died the year before.

The example on p.38 is even clearer and says nothing about the 5-year rule depending on the age of the deceased.

Did the IRS just blow it in those examples? And even if it did, do the examples constitute a de facto liberalization of the rules? After all, taxpayers are allowed to rely on the IRS's written information.

[Bees Knees]

Well, I wouldn't say the Pub is wrong. It never comes out and says you can use the 5-year rule even if the decedent was already taking RMD.

The example on page 37 follows the heading "Owner Died Before Required Beginning Date." And yes a 53 year old can have a father younger than 70½.

The 5-year rule stated on page 38 is a sub sub heading of the subheading "No table" which says "Do not use any of the tables if the designated beneficiary is not an individual and the owner died before the required beginning date."

I think the rules are correct in the Pub. It is just a misleading and poor way of arranging the information. That is why TTB adds the statement, to make it more clear.