Q. Our 83-year-old dad passed away earlier this year and left the three of us as equal beneficiaries of his IRA. He had not taken his required minimum distribution for 2016 and we know that needs to come out before the end of the year. My brother and I are in pretty high tax brackets and my oldest sibling is retired and living on a small pension and Social Security. She has suggested that we let her take Dad’s required minimum distribution since she is in a lower tax bracket and she also needs the money more than my brother and I. Our oldest sis was the executrix for Dad’s estate and we know this was a lot of extra work for her so we don’t mind giving her the extra distribution and avoiding the tax hit. Three questions: is this permitted, when we take our own distributions do we have to use our older sister’s age to determine the amount we have to take out each year, and can one or any of us convert our share to a Roth IRA? My brother and I would rather pay the taxes in one year and then not have to take distributions in subsequent years or if we decide to take distributions they’d be tax free.
A. If your Dad died with a non-Roth IRA (a traditional) you can’t turn it into a Roth IRA. The only way an inherited IRA can be an inherited Roth IRA is if it was a Roth IRA when the IRA owner died. If you try to do anything other than transfer your portion of your Dad’s IRA to an inherited IRA you will be deemed to have taken a distribution of the entire amount and that lump sum will be subject to ordinary income tax.
Your Dad’s required minimum distribution should be apportioned among the beneficiaries named on the beneficiary form. I wouldn’t risk possible IRS penalties just to save on taxes and help your sister with a larger distribution. If you want to help your sister and don’t need the inheritance you may be able to disclaim all or part of your inherited IRA. If this is desired, you should seek legal counsel before disclaiming. Your Dad’s required minimum distribution based on his age needs to come out before Dec. 31.
Since your Dad died after his required minimum distribution date and you were all named as beneficiaries, you each have the option of establishing an inherited IRA and transferring your share from your Dad’s IRA directly into your inherited IRA. The inherited IRA will be titled “(your name) Beneficiary IRA of your (Dad’s name) IRA.” Then each beneficiary IRA owner can use their own age to determine their required minimum distribution each year after the year of the original IRA owner’s (your Dad) death. You will use IRS life expectancy Table 1 and reduce the life expectancy factor by 1 for each subsequent year.
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All required minimum distributions from a non-Roth IRA are subject to ordinary income tax and if not taken each year they will be subject to taxes plus a 50 percent penalty. Spouses named as beneficiaries have some additional options when inheriting an IRA. These will be covered in another column.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624