Ask the Expert: Correctly title IRAs

Inherited IRAs must be correctly titled to preserve

Inherited IRAs must be correctly titled to preserve their tax-deferred status. (Credit: iStock)

Lynn Brenner

Lynn Brenner Lynn Brenner

Brenner answers questions about all aspects of family finance.

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I've inherited an IRA that was left to the owner's estate as beneficiary. I'm also the estate's executor. How should the IRA be retitled to be passed on to the heirs while preserving its tax-deferred status? The deceased was 73 when he died.

 

You can legally accomplish your goal, but brace yourself for an argument with the IRA custodian if its staff isn't familiar with the rules governing inherited IRAs.

Dividing this money while preserving its tax-deferred status is a two-step process, says Barry C. Picker, a Brooklyn tax accountant and IRA expert.

Step one is to retitle the IRA. If the original owner John Smith died on Jan. 2, for example, the IRA should be retitled "John Smith IRA (deceased Jan. 2, 2013), Estate of John Smith, beneficiary."

Step two is to get the custodian to divide this newly retitled IRA into new inherited IRAs for the heirs. If 25 percent of the money goes to Mary Jones, for example, 25 percent of the estate's retitled IRA should be moved into a new inherited IRA called "John Smith IRA (deceased Jan. 2, 2013), Mary Jones, beneficiary."

All of this can be done without triggering taxes, says Picker.

Mary Jones and the other heirs must take annual distributions from their inherited IRAs. The distributions can't be based on their own life expectancies because they inherited the IRA through John Smith's estate, not as its designated beneficiaries. Since he died at age 73, the heirs must base their distributions on a 73-year-old's life expectancy factor on the IRS Single Life actuarial table for beneficiaries. That factor is 14.8; so if Mary Jones' share is $25,000, her first distribution will be $1,689 -- $25,000 divided by 14.8.

The bottom line Inherited IRAs must be correctly titled to preserve their tax-deferred status.

Websites with more information 1.usa.gov/14p2jOD and bit.ly/12n0x0u

TO ASK THE EXPERT Send questions to Ask the Expert / Act 2, Newsday Newsroom, 235 Pinelawn Rd., Melville, NY 11747-4226, or email act2@newsday.com. Include your name, address and phone number. Questions can be answered only in this column. Advice is offered as general guidance. Check with your own advisers for your specific needs.

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