Rollover of Inherited Retirement Plan to an IRA

[WhiteOleander]

I am confused on the rollover rules.

My friend's mother passed away. She was drawing her retirement from Texas Teachers' Retirement. I believe that is a 403B. The deceased was well over 70 1/2.

My friend rolled her share into an IRA. Doesn't she have to continue with the distributions? She plans to leave it in the IRA until she herself retires. I believe that she has to have it out within 5 years.

Appreciated any guidance.

[DaveO]

She can take the RMD based on her life or her mother's. She doesn't have to empty it in 5 years although she can. She can't add to it or not take distributions.

[WhiteOleander]

She can take the RMD based on her life or her mother's. She doesn't have to empty it in 5 years although she can. She can't add to it or not take distributions.

So, it should have been rolled to a dedicated IRA? Not one she already had?

Also, if it is in an existing IRA, how can she remedy the problem? The mother died a little over two years ago and I know she hasn't taken anything out yet.

[ATSMAN]

Segregate the IRA

Did she explain to the bank the source of the rollover? It should have been setup as a rollover IRA. If the bank messedup they should be able to segregate the principal amount plus associated gain/loss and setup a rollover IRA that will NOT accept any new contributions. To minimize the beneficiary's taxes take the RMD based on the beneficiary's life expectancy.

[DaveO]

It should have been designated as a Beneficiary IRA. If she didn't do that she may be stuck taking the money out in 5 years.

[WhiteOleander]

Ok, thanks. I know what to tell her now.

[Burke]

So, it should have been rolled to a dedicated IRA? Not one she already had?
Also, if it is in an existing IRA, how can she remedy the problem? The mother died a little over two years ago and I know she hasn't taken anything out yet.

Yes, see Pub 571, Chapter 8.

"Nonspouse beneficiary: A nonspouse bene may make a direct rollover of a distribution from a 403(b) plan of a deceased participant if the rollover is a direct transfer into an inherited IRA established to receive the distribution. ..............The RMD rules that apply in instances where the participant dies before the entire interest is distributed will apply to the transferred IRA."

I believe if this was not done properly at the bank, they can correct it and issue the correct RMD's. Report on 2013 1040.

[WhiteOleander]

Yes, see Pub 571, Chapter 8.

"Nonspouse beneficiary: A nonspouse bene may make a direct rollover of a distribution from a 403(b) plan of a deceased participant if the rollover is a direct transfer into an inherited IRA established to receive the distribution. ..............The RMD rules that apply in instances where the participant dies before the entire interest is distributed will apply to the transferred IRA."

I believe if this was not done properly at the bank, they can correct it and issued the correct RMD's. Report on 2013 1040.

Yes, that's what I had read. The part that threw me was that tha IRA had to be established for this rollover. I wanted to make sure I didn't mis-understand.

[Burke]

The reason for the separate inherited IRA, is that it is subject to different distribution rules as discussed above. If it were combined into an existing IRA which she established and had qualified earnings with which to contribute, the withdrawals could not be isolated between the two types.