Don built a business, and a remarkably successful investment portfolio. He and Charlene enjoyed many years together in retirement. Then we met their daughter Mandy during a regular client checkup meeting, when Don told us he’d been diagnosed with Alzheimer’s.
We watched his capacity decline over several years, but Mandy always joined the meetings and we were able to transition management of the accounts to her mother, with Mandy always present on the conversations.
About two years after mom became a widow, Mandy called and asked if we’d noticed anything in mom’s speech.
Two weeks later, she called again. Charlene had Alzheimer’s, too!
But unlike her father, who lived several years with no memory, mom mercifully survived only a few weeks after the diagnosis.
Ralph Bender here for Enduring Wealth Advisors®
Mandy rolled Charlene’s IRA into an Inherited IRA. That’s a very special type of Individual Retirement Arrangement account established for beneficiaries who are not married to the person who died.
The rules of Inherited IRAs are different from all other retirement accounts.
The government wants the money to come out of the account, so it can collect the taxes on the distributions, but they give the recipients some latitude on how to take those distributions.
During her most recent tax filing, her tax adviser told her to roll the Inherited IRA into her own and stop taking the distributions. Remember, Don was very successful, and the Required Minimum Distributions by the time Mandy got the account were significant.
Fortunately, Mandy asked us about it. In her case, because Charlene died before 2020, Mandy is allowed to spread the distributions over the rest of her life following the same rules for people over age 72 who don’t want to take money from their own IRAs.
It’s not uncommon for CPAs or Enrolled Agents to get this wrong. Even the IRS recently released an erroneously written publication (590-B) about the process. (They issued a notice about it within a few days, due to the uproar of the Certified Financial Planner community.)
The only way money can come out of an Inherited IRA is as a taxable distribution. It cannot be rolled into another IRA of any type.
And the only way money can get into and Inherited IRA is if it’s done correctly after the original owner dies.
There are no provisions to fix mistakes. If it doesn’t get done right the first time, all the money is taxable.
If someone who loves you enough to designate you as their IRA beneficiary recently died, our sympathies go out to you, and if you have any questions, you know where to find us.
This is a hypothetical situation based on real life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.