Inherited IRA - trustee-to-trustee transfer

[ESCtaxes2020]

Hello,

If my grown son inherits an IRA from my father, can that IRA be transferred via trustee-to-trustee transfer to an inherited IRA for his benefit and last longer or is the 10-drain out rule the law of the land regardless?   Thank you.

[Critter-3]

He has two options which the IRA trustee should have told him about. Option one ...drain the count over the required 10-year period. Option two ...take it over his lifespan according to the actuarial chart that the IRA custodian shall have on hand.

[fanfare]

In what year did he inherit the IRA ? or is this all hypothetical?

[ESCtaxes2020]

Hi Fanfair,

Apologies for the delay; I do appreciate your help.  This is not a hypothetical.  The IRA was inherited this year.  The decedent passed in August 2020.  Basically, without the stretch rule, I'm really at a loss as to what to advise my son.  He is grateful for the inheritance and we're trying to make the most of it.  If he does the trustee transfer, it's my understanding that if he takes any money from the account, he will be taxed for its entirety in that year.  Perhaps he should simply keep the BDA IRA and remove yearly lump sums/ RMDs?  Ugh.  BTW, the decedent had not taken their RMD  for this before death.  Thank you for any help.

~ESC

[ESCtaxes2020]

Update to below: the decedent had not taken their RMD for this year before death. @fanfare 

Thank you.

[fanfare]

 he will not be taxed on the entirety. He will be taxed on the amount that he takes out.

If his income is otherwise low, the tax on the RMD could be low or zero.

If he has other earned income, the RMD up to that amount can be "moved" into his own IRA so the cancel out.

There's no stretch limitation rule on your own IRA.

[fanfare]

if the decedent had an RMD due  but did not get to take it, the heir must take care of that first and immediately  before removing any other money.

[ESCtaxes2020]

Thank you.  Just to be clear my adult son can arrange with the IRA admin firm (T Rowe Price) for a direct trustee-to-trustee transfer/ inherited IRA, take father's necessary 2020 RMD  and then just let the money grow "indefinitely" in son's "Inherited IRA," thereby avoiding the 10 year SECURE Act depletion requirement?   How is this possible when the act is so clear?  Wouldn't everyone be doing this to avoid the 10 year cap?   Thanks for any clarification. 

[macuser_22]

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@ESCtaxes2020 wrote:

Thank you.  Just to be clear my adult son can arrange with the IRA admin firm (T Rowe Price) for a direct trustee-to-trustee transfer/ inherited IRA, take father's necessary 2020 RMD  and then just let the money grow "indefinitely" in son's "Inherited IRA," thereby avoiding the 10 year SECURE Act depletion requirement?   How is this possible when the act is so clear?  Wouldn't everyone be doing this to avoid the 10 year cap?   Thanks for any clarification. 

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No.   A inherited IRA can only be transferred into another inherited IRA account that must remain in the Fathers name as the owner of the IRA with your son as benificuary.    It will always be an inherited IRA with the same distribution requirements wherever the IRA is held.

Only an IRA that is inherited by a *spouse* can be treated as the spouses own IRA and put in the spouses name at which point  is no longer inherited.

See IRS pub 590B for details under Inherited from someone other than spouse.

https://www.irs.gov/publications/p590b#en_US_2019_publink1000230542

[fanfare]

Since you can no longer keep an inherited IR for the rest of your life, you have to figure on taking out about one tenth of it every year,  or you will be hit with a big balloon tax payment at the end of the period.

[Opus 17]

This inherited IRA must always be an inherited IRA.  Even if it is transferred to a different custodian it remains an inherited IRA and it must be cleared out within 10 years.  

Separately, the beneficiary may be able to reduce their tax benefit by making contributions to a new IRA but this would be treated as a separate transaction subject to the usual rules for contributing to a regular IRA, and the withdrawals from the inherited IRA will be taxed accordingly.  

Depending on your nephews age, other income and the amount of the IRA, you may be do some intelligent timing of the withdrawals, but that’s all.  

[ESCtaxes2020]

Thanks All.  I do appreciate your help and input.

A few related questions regarding this inherited IRA situation:  Decedent had three separate IRAs (thankfully all at same fund firm, T Rowe): a SEP, a Roth and a traditional. 

 - Is the RMD necessary given Congress's waiver of RMDs for this year given COVID?  I.e. Does the waiver apply to my son, the beneficiary?

- If son takes 10% out of IRAs for 2020 does this satisfy decedent's RMD? 

- Can necessary withdrawal come from any one of the IRA accounts or does it have to span some proportion of each of the three? 

- How does my son figure out the RMD for 2020 as decedent had not taken RMD for 2020 prior to passing/death? 

- Did 10 year withdrawal rule go into effect at year of descendant's death or does the 10 year clock start next year?

Thank you All.