Inheriting an IRA

[Deleted]

As I've mentioned before, we are creating an estate plan and setting up our trust which makes me focus more sharply on exactly how things will work financially after one of us dies.  In our case, we are both over 72-1/2 and taking RMD's.  Estate tax is not an issue.

I've read a variety of resources on our options when one of us inherits the other's traditional IRA.  Here's my basic understanding of the process and choices.  Can someone fact check me on my understanding of this under current IRS guidelines?  

1. Spouse #1 dies, leaving traditional IRA to Spouse #2
2. RMD for Spouse #1's IRA must be satisfied for the year of death regardless of anything else
3. Spouse #2 has the choice of setting up a beneficiary IRA or rolling over Spouse #1's IRA into their own traditional IRA
4. Spouse #2 has the option of taking future RMD's over their lifetime based on the new combined amount or electing other lump sum periodic distributions.  All distributions from the new combined IRA are subject to income tax

If my assumptions above are correct, I have two questions.

1. Can equities, bonds, ETF's, etc held in Spouse #1's IRA be transferred to Spouse #2's IRA in-kind or is liquidation required?
2. What, if any, is the potential benefit, tax or otherwise, if Spouse #2 elects to establish a new beneficiary IRA vs. rollover?

TIA!  

[Deleted]

Sept 4, 2022 15:39:16 GMT -5 soupandstew said:

If my assumptions above are correct, I have two questions.

1. Can equities, bonds, ETF's, etc held in Spouse #1's IRA be transferred to Spouse #2's IRA in-kind or is liquidation required?
2. What, if any, is the potential benefit, tax or otherwise, if Spouse #2 elects to establish a new beneficiary IRA vs. rollover?

The answer to Question 1 is yes from personal experience in 2016- I just moved the assets in my late husband's IRA to my own IRA.  Nothing was liquidated.  Both IRAs were at the same brokerage, which helped.  

I'm not aware of any advantage to keeping it in a new, beneficiary IRA.  RMDs are based on the totals of all your IRAs anyway.  To me it would just have complicated things.

DH wanted to leave his IRA of about $14,000 to his son (my stepson), who was in his 40s at the time.  DSS seemed avidly interested in how to  liquidate it immediately, regardless of tax consequences.   This wasn't in the will- everything went to me- so I just moved DH's IRA onto mine and wrote DSS a check from my regular account.

[susana1954]

soupandstew, you just paid a lawyer to help you come up with an estate plan.  Did you guys not go over this?

I only say this because it is dangerous to substitute advice you get on an internet message board (even one as savvy about money as we think we are!) for professional advice.

If you didn't go over this with the lawyer, call the institution that holds your IRA and ask these questions.  I know Vanguard is really helpful although you may use another one. 

[Deleted]

Sept 4, 2022 15:58:34 GMT -5 @athena53 said:

Sept 4, 2022 15:39:16 GMT -5 soupandstew said:

If my assumptions above are correct, I have two questions.

1. Can equities, bonds, ETF's, etc held in Spouse #1's IRA be transferred to Spouse #2's IRA in-kind or is liquidation required?
2. What, if any, is the potential benefit, tax or otherwise, if Spouse #2 elects to establish a new beneficiary IRA vs. rollover?

The answer to Question 1 is yes from personal experience in 2016- I just moved the assets in my late husband's IRA to my own IRA.  Nothing was liquidated.  Both IRAs were at the same brokerage, which helped.  

I'm not aware of any advantage to keeping it in a new, beneficiary IRA.  RMDs are based on the totals of all your IRAs anyway.  To me it would just have complicated things.

DH wanted to leave his IRA of about $14,000 to his son (my stepson), who was in his 40s at the time.  DSS seemed avidly interested in how to  liquidate it immediately, regardless of tax consequences.   This wasn't in the will- everything went to me- so I just moved DH's IRA onto mine and wrote DSS a check from my regular account.

Thank you, Athena.  That's very good to know about transferring assets without liquidation.  Some stocks are just too good to sell if you don't have to, and fire sales are never good.

I'm glad you found a way to satisfy your DH's wish to gift his son without adverse tax consequences.  I hope the not-so-young man grows in financial wisdom.

[Deleted]

Sept 4, 2022 16:10:53 GMT -5 susana1954 said:

soupandstew , you just paid a lawyer to help you come up with an estate plan.  Did you guys not go over this?

I only say this because it is dangerous to substitute advice you get on an internet message board (even one as savvy about money as we think we are!) for professional advice.

If you didn't go over this with the lawyer, call the institution that holds your IRA and ask these questions.  I know Vanguard is really helpful although you may use another one. 

Thank you, Susana, I appreciate your thoughts.  Our attorney wisely does not give tax advice, nor does our Merrill Lynch advisor.  The final recommendation of action will be made by our CPA in coordination with our ML guy based on then-current tax law and the prevailing market. There were some significant changes to the IRS code inn 2020.  I just wanted a quick check-in with folks here on the basic situation today.  The IRS website is surprisingly helpful.  

[susana1954]

Sept 4, 2022 16:25:47 GMT -5 soupandstew said:

Sept 4, 2022 16:10:53 GMT -5 susana1954 said:

soupandstew , you just paid a lawyer to help you come up with an estate plan.  Did you guys not go over this?

I only say this because it is dangerous to substitute advice you get on an internet message board (even one as savvy about money as we think we are!) for professional advice.

If you didn't go over this with the lawyer, call the institution that holds your IRA and ask these questions.  I know Vanguard is really helpful although you may use another one. 

Thank you, Susana, I appreciate your thoughts.  Our attorney wisely does not give tax advice, nor does our Merrill Lynch advisor.  The final recommendation of action will be made by our CPA in coordination with our ML guy based on then-current tax law and the prevailing market. There were some significant changes to the IRS code inn 2020.  I just wanted a quick check-in with folks here on the basic situation today.  The IRS website is surprisingly helpful.  

I wasn't thinking your advisor would tell you what to do, but he/she should know something about the general tax consequences of your choices.

For example, when I converted some of my IRA to my Roth IRA, the "advisor" helping me told me that it was a taxable event.  He also told me that such transactions can no longer be reversed.  I knew that, of course, but if I hadn't, that sort of general guidance would be helpful.

And if there were changes to the IRS code in 2020, that would make @athena53's information possibly outdated.  Her husband died before mine did, and my husband died in 2019.

But your CPA is your best bet, and it sounds like you are headed in that direction.  Good luck.

[Deleted]

Sept 4, 2022 17:42:19 GMT -5 susana1954 said:

And if there were changes to the IRS code in 2020, that would make @athena53 's information possibly outdated.  Her husband died before mine did, and my husband died in 2019.

But your CPA is your best bet, and it sounds like you are headed in that direction.  Good luck.

I agree with that- it's why I specified that DH died in 2016. My Dad died late last year and we were fortunate that one brother is a tax CPA. IRAs inherited from someone other than a spouse have different rules and with recent changes, even the experts were uncertain about what the wording meant. They have to be withdrawn over 10 years but it was unclear whether you could wait 10 years and then withdraw it all or had to withdraw some every year. I'm playing it safe and have already withdrawn 20%.

So yes, a CPA is the best source.

[Rukh O'Rorke]

based on what I've been absorbing, my goal will be to try to empty the IRAs as much as possible for my estate planning so as to ease tax burdens on my heirs.

If I do live as long as parents probably won't matter as the RMD gets to be 10% in your early 90's, so certainly creeping up from a SWR for a lot of years prior. Looks like it is just a hair above 4% starting at age 73. Which is what it is designed for, get er all taxed before you go! But I'd hate to think that my legacy would end up being taxed at 30% coming on top of heirs usual income, if my demise was untimely/earlier than anticipated!

But I suppose even if the taxable part is still large and I make it to at least late 80's, then they could just retire and use the 401k for their first 10 years and see how long it will last them, even if any may be left over after converting to taxable accounts to cover additional time.

I think when we are all together at christmas, will have a convo/planning session to start them on understanding these issues. Just in case I even go before I retire. Want them to have at least a frame of what will happen and how to handle it best to secure their future. It would be a hard time for them to try to figure these things out. Hope I'm not flattering myself, lol!

[Deleted]

Sept 5, 2022 12:08:01 GMT -5 Rukh O'Rorke said:

based on what I've been absorbing, my goal will be to try to empty the IRAs as much as possible for my estate planning so as to ease tax burdens on my heirs.

If I do live as long as parents probably won't matter as the RMD gets to be 10% in your early 90's, so certainly creeping up from a SWR for a lot of years prior. Looks like it is just a hair above 4% starting at age 73. Which is what it is designed for, get er all taxed before you go! But I'd hate to think that my legacy would end up being taxed at 30% coming on top of heirs usual income, if my demise was untimely/earlier than anticipated!

But I suppose even if the taxable part is still large and I make it to at least late 80's, then they could just retire and use the 401k for their first 10 years and see how long it will last them, even if any may be left over after converting to taxable accounts to cover additional time.

I think when we are all together at christmas, will have a convo/planning session to start them on understanding these issues. Just in case I even go before I retire. Want them to have at least a frame of what will happen and how to handle it best to secure their future. It would be a hard time for them to try to figure these things out. Hope I'm not flattering myself, lol!

I think having that convo is a wonderful idea.  As Athena noted, non-spousal IRA inheritance is a whole different world with potentially expensive complications

[snapdragon]

When Dad passed in 2020 due to the new laws I have to empty out his IRA in 10 years. So no matter what happens the account has to be emptied out. It sucks and I am not looking forward to the next few years.

I know that I have really good people that are assisting me -  my Financial Guy and my Accountant to help with the taxes and everything.