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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Hello again, Just a question of clarity on the term FBO

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Hello again,

Just a question of clarity on the term FBO (For Benefit Of) --

So I have gone through my Fidelity and set up an Inherited IRA account and contacted my brothers old company and their 401K plan administrator letting them know about doing the inherited rollover IRA.

Things go along I'm expecting a digital transfer between the holding company of the 401k (John Hancock) and Fidelity, then on day a check shows up in a UPS envelope from the company's plan administrator. It's from JH payable to "Fidelity Investments FBO: my name IRA ACCT:" & Fidelity's address, etc. for the full amount of the current value of my brother's 401K!

There may be a disconnect here that leaves me on the hook for a major tax event.

First my new supposed inherited IRA account is attached to my current brokerage account at Fidelity and labeled only as an "IRA".

Second, (another) tax consultant told me that the account should be identified as an IRA with my brothers name attached i.e. the TITLE of the IRA should be: "IRA FBO: My Name as beneficiary of My Brother's Name."

So my question is that if I deposit this check as labeled into the Fidelity IRA account, will it be interpreted as a cash-out withdrawal from my brother's 401K? And then expectantly, a 1099 would show up on my doorstep for the full amount resulting in a huge tax spike.

Or does the "FBO:" minus my brother's name on the check make a that big a difference?

Considering I've jumped through the hoops to set this up as an inherited IRA account and modulate the taxes, I don't want to make a mistake here.

Should I get a separate acct at Fidelity labeled with his name referenced as shown above? Then have the check reissued with the correct TITLE?

Haven't contacted Fidelity yet, but have found that these big investment companies are like dealing with Jabba-the-hut, they don't care as long as they get paid. I can hear them now, "No, sure it will be ok, give me that check" and then when the 1099 appears, them saying, "Well you should of took care of that when you started." Arrg.

Advise appreciated.

-T
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.
Hi,

You're fine ... This is the way that most IRA custodial transfers are done today.

FBO stands for "For the Benefit Of"

It's this wording that keeps the check (which needs to be deposited into your IRA at fidelity) from being treated as a distribution.

The linking of your individual account and IRA at fidelity is just a convenience issue. The IRA IS a different account.

As an example: If you took that check to a bank and tried to cash it or deposit it into any other ownership than a "Tour Name" IRA, they will not do it.

You will not get a 1099 or have a taxable event until you distribute any funds from your beneficial IRA




Hope this helps

Lane

Let me know if you have questions




Customer: replied 1 year ago.

Thanks for your reply, it's reassuring.

There is some debt on my brother's estate that I paid out of pocket.

When is the soonest that I could make a distribution from the inherited IRA?

Some sources say beginning of the following year, others right away, others say a 5 year total distribution is required...

 

Appreciate the follow-up.

Expert:  Lane replied 1 year ago.


You can distribute ANYTIME you like.

But it's important to do a little planning first.

You basically have 2 options (What this is about is the IRS "getting theirs")

(1) Get it all out within five years

(2) Take it out (using the IRS mortality tables) over your life expectancy

Te issue is that WHEN you take it out it's TAXED (and the amount you take out is taxable income to you that year - added to any other income on you tax return)


SO what they are saying is get it all out within 5 years (and pay the tax on it as you take it out)

OR

If you take it out over your life expectancy, and will let you spread out that taxation even further.


Either way, it's taxed AS (added to your other taxable income) you pull it out of that IRA shell.


Here's an excellent article on that:

https://personal.vanguard.com/us/whatweoffer/ira/inheritediranonspousermd


Hope this helps

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4167
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thanks Tom,

Let me know if you have questions.

Lane

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