Inherited IRAs Highlight Mailbag

Plenty of questions about required minimum distributions (RMDs) and inherited IRAs in this week's Slott Report Mailbag. As always, we stress the importance of working with a competent, educated financial advisor to keep your retirement nest egg safe and secure.

1.

IRA Experts --

I made a contribution of $4500 on December 6, 2005. When can I take this out without penalty? Is there a hard-and-fast rule that requires me to leave it in for 5 years? (My previous withdrawal was $35000 on April 12 of this year, I contributed that amount on April 6, 2004).

Answer:
Contributions can always be withdrawn from your Roth IRA at any time without tax or penalty. Roth IRAs have ordering rules for distributions. The first money out is your contributions, then converted amounts (first in, first out), and lastly earnings. You cannot take out earnings tax and penalty free until 5 years after you established Roth IRA AND you are at least age 59 1/2.

2.

My wife is age 67 and has an IRA valued at approximately $200,000 and I (age 80) am the sole beneficiary. My wife just passed away on July 10 of this year. How do I treat the inherited IRA and when will my RMD begin?

Thank you,

Anthony Mastrangelo
Drexel Hill, PA

Answer:
First, sorry for your loss. You have two options. If you keep the account as an inherited IRA you have no required distributions until your wife would have been 70 1/2. If the account remains an inherited IRA after that, then the distributions are calculated using the Single Life Table to look up your factor each year. Your required distributions will be larger than they would be if you owned the account.

Option 2 is to roll the inherited IRA into your own name. You then take distributions each year based on your age and the Uniform Lifetime Table. This will give you a smaller required distribution each year. You can wait to do the rollover until the year your wife would have been 70 1/2. In either case, you should be sure to name a beneficiary on the account.

3.

I have a 22-year-old whose mother died and left her a $100,000 Traditional IRA among other things. Is there any way we can roll the inherited Traditional IRA to an inherited Roth IRA and spread the tax over the two years? Please tell me there is some way we can do this. Thanks for your help.

Answer:
Sorry. An IRA inherited by a non-spouse beneficiary can NEVER be converted to a Roth IRA. A conversion is treated as a rollover for tax purposes and non-spouse beneficiaries can never do a rollover.

By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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