Tax on distribs from inherited IRA

How did the beneficiary form read? To properly inherit an IRA from a non-spouse the account should have been retitled to JoeTaxpayer Jr., Inherited IRA Beneficiary of JoeTaxpayer, Senior Charles Schwab Custodian

If not done properly, the IRA may have to be withdrawn in full within 5 years. But, yes, those withdrawal are taxed as received by each beneficiary.

Joe

Yes. However:

1) If there's any non-taxable contributions to the IRA (or it was a Roth-IRA), some part (or all, if Roth) won't be taxable. 2) If there's an estate tax imposed, there's an itemized deduction that is paired with this income.

Unlike the other response, I don't see renaming the account as necessary. Its name doesn't affect its character.

Now, as to distributions, if not done properly over the lives of the beneficiaries, the 5 year rule may apply.

If a non-spouse inherited IRA is not retitled by the end of the year after the death of the owner, the stretch (withdrawal over life expectancy of beneficiary) aspect is lost, and the 5 yr rule kicks in.

I don't recall seeing that in the Code, etc....

What I do see is that the 5 year rule kicks in if the beneficiaries haven't started drawing equal payments over their expected lifetimes (per the annunity tables of section 72's TRs) by the 4th month following the year which follows the year of death.

I am mistaken. After writing my note, I looked for the citation to back myself up, and of course, didn't find it. I still recommend splitting the account, as the needs of the two beneficiaries may differ.

I stand corrected. Thank-you.

After the passage of the Pension Protection Act of 2006, the IRS finally issued guidance that included beneficiary IRAs. See IRS Notice 2007-7 that requires the correct naming of an inherited IRA to identify it as such. This was the Act that allowed a non-spouse beneficiary of a pension plan to roll it over into an IRA but only if the IRA was named and treated as a beneficiary IRA.

There is nothing in the Notice that says what happens if you don't name it correctly. However, based on my discussions and readings on the subject.... nothing happens as long as you treat it as an inherited IRA. Treat it as your own and you become subject to the five year rule and any subsequent penalties for violating that rule. As long as you don't treat it as your own, you can subsequently ask the trustee to rename it in order to conform to the inherited IRA guidance.

What does treating it as your own mean? You make contributions to the account. You make unlawful rollover into another type of account or plan. You fail to take MRDs according to the rules and after five years the account still exists.

I have not read that notice for purposes of this reply.

I don't see renaming as necessary. Except for certain parent-child namings (i.e. Jr. & Sr. but not used in the account name), the beneficiary is going to have a name different from that of the original IRA owner, so in such a case, it is clear that the IRA was inherited without renaming.

So, it's unenforcable.

All of those are actions covered by law or regulations prior to the notice.

After PPA '06 you will be hard pressed to find a trustee that will open an inherited IRA without the naming convention used in the Notice.

Thanks for the confirmation.

Sorry that I omitted some critical details. It is a Trad IRA. Only deductible contributions were made to the IRA.

I do not think there will be any estate tax. The total estate is well below the exclusion amount (for 2009, say).

But I am still curious about you comment. It might be relevant to another situation that I will face in the future.

What is the itemized deduction? Who claims it?

If you would like to point me to a document (IRS Pub, IRS form instructions, IRS code/reg citation) so that I can RTFM, that's fine.

Thanks again.

IRC Section 691 - Income with respect to a decedent. Subsections (c) and (d) reference the deduction.