Last time, we looked at how the term IRA is defined; who can establish a brand new IRA; and the definition of the term “inherited IRA”.
Now we dig deeper into the concept of an inherited IRA. We’ll do this using a real-life example of an individual beneficiary. Later we’ll look at a real-life example of a charity beneficiary.
Dad dies, having named Daughter as beneficiary of his IRA. Daughter becomes an IRA beneficiary upon Dad’s demise. Daughter has inherited Dad’s IRA. Dad’s IRA is now an inherited IRA. Dad is still the named owner of the IRA, and the IRA bears Dad’s name.
The custodian (= trustee) of Dad’s IRA is financial institution A. Daughter handles all of her financial business at financial institution B. Daughter wants to get the money Dad left to her housed in an IRA (which is exempt from tax) at B.
Daughter does this by setting up at B what the IRS calls a “beneficiary IRA”. The beneficiary IRA is set up in Dad’s name for the benefit of Daughter. It bears Daughter’s tax ID #. Now, a tax-free trustee-to-trustee transfer is made from the inherited IRA at A to the beneficiary IRA at B.
This series of moves is not spelled out in the tax law. The IRS has simply said, but not in a way that constitutes tax law, that this series of moves is permitted. Odd, huh?
There’s a lot more to say next time. Before we stop for now, however, note that once Daughter attains 70.5 years, she can begin making IRA rollover gifts to charity out of her beneficiary IRA. That’s pretty cool.
Click here to read Part III.
by Jon Tidd, Esq