Inherited IRA Q&A

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Question:  I inherited an IRA from my brother last week.  When am I required to take distributions?

Answer:  If your brother was over the age of 70 ½ (70 and one-half) and was taking required minimum distributions (RMDs), then check and see if he took his RMD this year before he died.  If he didn’t, then you must take his RMD, which is the amount he would have been required to take based upon his life expectancy.  You must then start taking annual RMD distributions based upon your own life expectancy next year.  Make sure you properly set up the IRA as an inherited IRA in your brother’s name for your benefit and under your social security number.  If you fail to take a required distribution, the IRS will charge you a penalty equal to 50% of the amount you should have taken.

Question: I inherited a Roth IRA from my spouse, who died last year.  Do I have to take annual distributions? 

Answer:  No.  A spouse can roll a Roth IRA into her own Roth IRA.  Roth IRA owners are not required to take distributions. 

Question:  I inherited a Roth IRA from my father, who died last year.  Do I have to take annual distributions?  Some people tell me I do and some say I don’t.

Answer:  Since Roth IRAs are tax-free, many people think that a beneficiary does not have to take required minimum distributions.  However, unlike owners, Roth IRA beneficiaries must take an annual RMD.  You can set up an inherited Roth IRA as the beneficiary and take tax-free RMDs each year based upon your own life expectancy. This is a great way to stretch out the tax-free feature of the Roth IRA over a long period of time.

Question:  My two sisters and I inherited an IRA from our father.  Can we split his IRA into three inherited IRAs?

Answer:  Yes.  You can create three inherited IRAs and then you can each make your required minimum distributions based upon your individual life expectancies.

Question:  I am 75 years old with an IRA that I don’t really need for support.  I would like to use some of my IRA money to help a local charity, but I don’t want to pay tax on the money I take out of the IRA.  Can I send the IRA money directly to the charity and avoid the tax?

Answer: Maybe.  The Pension Protection Act of 2006 contained a provision that allowed IRA owners over age 70 ½ to transfer up to $100,000 per year from their IRA to a qualified charity.  This tax-free transfer expired December 31, 2007, but Congress has been extending it annually since then (it was again extended in 2014 for the 2014 tax year). 

However, because of the continued uncertainty that Congress may not continue to extend the provision, you should have your IRA custodian make the distribution checks payable to the charities you would like to support.  Then, if Congress extends it again in 2015, you can treat the distributions as qualified charitable distributions (QCDs) that are not included as income on your tax return.  QCDs are particularly valuable for older people that don’t itemize their deductions on their income tax return.  They can also save you money if you are subject to Alternative Minimum Tax, the high income reduction in itemized deductions, or high Medicare premiums. 

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to ken@montereypw.com.