IRA heirs advised to clarify account status before liquidating it — MarketWatch
Three heirs to a $7,000 IRA are considering liquidating the account after the probate process is completed, depositing the funds into the estate’s bank account and dividing the remainder among themselves. The executor of the estate also asked whether three separate inherited IRAs need to be opened. This was reported in a MarketWatch column.
The inquiry stated that no beneficiaries were designated on the IRA. The executor is obtaining a tax identification number to open an estate bank account. If divided equally, each of the three heirs would receive about $2,333 before possible taxes.
Beneficiary status
The column’s author noted that the procedure depends on the type of IRA, whom the account custodian considers to be the beneficiary, and whether the deceased owner had begun taking required minimum distributions (RMDs). If there is no direct beneficiary designation, the estate may be designated as the beneficiary under the plan’s terms or state inheritance rules.
Different distribution rules apply to Roth IRAs, and qualified distributions may not be taxable. Heirs who are not the owner’s spouses cannot transfer the assets into their own IRA. Law firm Nixon Peabody also noted that they are not eligible for a 60-day rollover: funds paid directly to an heir are taxed as ordinary income and cannot subsequently be transferred into an inherited IRA.
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Distribution deadlines
If the estate is the beneficiary and the owner died before the RMD start date, the five-year rule may apply. Under it, the entire account must be distributed by December 31 of the fifth year after the owner’s death. In that case, heirs younger than 59½ do not pay the 10% early-withdrawal penalty.
If the owner died after the RMD start date, distributions must continue based on the owner’s life expectancy. The columnist suggested that this option may apply to the account described, but emphasized that the assumption is based solely on the small account balance.
In the author’s view, for an amount of $7,000, a lump-sum liquidation of the IRA may be the simplest practical solution. He advises contacting the account custodian to determine whether it can transfer the funds to the estate, then accounting for the tax and distributing the remaining assets among the three heirs. At the same time, a small account balance does not eliminate federal distribution rules.
