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Jonathan Tierney
Jonathan Tierney, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 307
Experience:  Tax Accountant at Praxair, Inc.
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My widowed mother died recently. She had a small IRA and had

Customer Question

My widowed mother died recently. She had a small IRA and had designated my two brothers and me as equal beneficiaries. Because of the small amounts involved we wish to take our respective shares as fully taxable distributions as opposed to establishing Inherited IRAs of our own to receive the distributions.
My question is: Can the custodian (***** *****) make taxable distributions to each of us of our respective IRA inheritance without our having, first, to establish Inherited IRA accounts?
Submitted: 9 months ago.
Category: Tax
Expert:  Jonathan Tierney replied 9 months ago.

Hi, my name is ***** ***** I can help. Unfortunately, if ***** ***** makes distributions directly from your mother's IRA that would be a distribution to her estate which may mean her estate would need to file a Form 1041 income tax return. The estate would then have to issue you K-1's for your share of the income if it is distributed.

So therefore it is best to wait until the custodian can set up the new inherited IRA accounts.

I hope this answers your question. Please let me know if I can clarify anything or answer any additional questions.

Thanks, Jonathan

Customer: replied 9 months ago.
I believe your answer is incorrect. Designated IRA beneficiaries may rollover their inherited portion of an IRA. This is the same as pay-on-death designations for CD's. In our case, there is no probate estate. Please, read again my question. That is, can we take the distribution and declare the full amount as taxable income on lines 15a&b, or do we have each establish inherited IRAs and rollover our portions of Mother's IRA to them before we, then, take 100% taxable distributions.
Expert:  Jonathan Tierney replied 9 months ago.

Has the custodian already refused to issue you distributions? What makes an IRA different from a transfer-on-death or TOD account, is that IRA distributions must be reported to the IRS, with is not the case (necessarily) with a regular bank account or TOD brokerage account. Non-IRA accounts report only the income earned on the account, and if there is no Social Security number on file, the bank or brokerage would subject the earnings to backup withholding. Once the financial institution determines you are the correct beneficiary, it can just issue you the funds without providing you with a 1099 form at all. However, there is no backup withholding on an IRA account, the custodian simply cannot make a distribution with a Social Security number.

A beneficiary designation (BD) form might only contain your name, address, date of birth, and relationship to the account owner, and not your Social Security numbers. Even if it BD form does include your Social Security number the financial institution must ensure it has your correct number, received from you, so it can then issue you the proper 1099-R along with the proceeds of the account.

You are probably right that a financial institution does not legally have to retitle the account, however, they are within their right to insist that a new IRA account does get set up. It does do not much obligation to turn funds over to you, at least not right away, and not without you providing them with the information they may be asking for. By formally setting up new IRA accounts it can ensure that it is not complied with federal laws and regulations requiring them to record an verify information about its customers as well as ensure that the 1099s have been issued to the correct beneficiaries. When you inherit an IRA from a non-spouse, you have at least five years to take liquidate the account, and some people thinking they need to take a distribution immediately have sued the financial institutions for not advising them of all their options.

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