Inherited ira

[RLymanC]

A 15 year old inherited his mothers 401-K balance. Rolled it into an IRA.

Lives with Grandmother. They want to purchase a house.

50,000 down,,first time home buyer.

Will there be an early distribution penalty on the $40,000. Mother was 42 years old on date of death last year.

[rtsietsema]

Can the minor enter into a contract?

If you could use the entire IRA as a down payment, there would be a penalty for the excess above $10,000 withdrawn. However, I am not sure that a minor can enter into a contract to purchase the house in the first place. And then if the minor's name is not on the title, I doubt the IRS would allow the use of the IRA funds to make the down payment if they reviewed the purchase. If that is the case, all funds used from the IRA would be subject to tax and penalty.

They might want to find another way to fund the down payment.

[Snaggletooth]

Death Exemption

Why should ANY of his mother's IRA be penalized? Is there not an exception to the penalty for death?

Example: Mother dies with $50,000 in IRA. 15-yr old kid "rolls" it into his own IRA. Between death and
now it earns $100. So $50,100 is cashed out. He should pay tax on $50,100 and pay penalty on $100.

And what about the requirement to take all of it out within 5 years?

[Burke]

Both replies make sense. As a minor beneficiary, the IRA probably has a custodian on it and that may be the grandmother. I have a client whose father left his IRA equally to his grandchildren, who are minors. Every year the father, who is custodian, raids both of them for huge withdrawals. It is taxed to the kids, but no penalties. So no withdrawal whether principal or earnings, no matter how big or what it is for, should be subject to the early w/d penalty.

A minor cannot enter into a contract until he is 18, so he can't buy the house -- but that is a moot point.
As the grandmother, I would be very careful in using this kid's IRA money to buy a house which, by necessity, has to be in her name.

[rtsietsema]

Clarification on roll over?

The original post did not specify if the son rolled it and opened a specified inherited IRA account, or opened it as his own. The latter would be subject to the normal distribution rules and penalties, would it not?

I believe I was in error. The son could not establish the IRA as his own. That option only exists for a spouse.

[Lion]

Are you sure mom didn't provide over 50% of daughter's support. Fair rental value of her home furnished, health insurance, car insurance, birthday and holiday gifts, etc. Do the support worksheet.

And as has been mentioned, EIC does not have a support test.

[John of PA]

It seems to me he would be getting a 1099-R code 4 on account of death. This is an exception to the 10% penalty, but is taxable. His choices are to roll it into an inherited IRA, or just take the money straight and pay taxes (but no penalty) on it.

[Golden Rocket]

1099 Code 1

Since he rolled it over into his own IRA and did not take distribution directly from his father's IRA, I believe he will get a code 1.

However, he still qualifies for the exception and should file a 5329 marking the exception and showing the amount.