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Ask Ed Slott: Dealing With Inherited IRAs
Thursday, February 21, 2013
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I inherited an IRA from my elderly friend who passed away in 2011. It contained $300,000. The IRA is still in Valley National Bank. I have been taking the RMDs the past two years, once in 2011 and again in 2012. The IRA is still in her name, but shows that I am the beneficiary and that I am allowed to take the RMDs. My question is this: what options do I have with this IRA? Can I/should I roll it into a Roth IRA?  Should I do nothing, as it is earning over 3% interest, and continue to withdraw the RMDs? What do I do and what should I HAVE done?

You cannot convert these funds to a Roth IRA because you are a non-spouse beneficiary. You must continue taking RMDs each year or you can take more than that amount. You should speak to a financial advisor with regards to the investment issues.

I have gold coins in a Roth IRA. Can I take distribution of the coins without cashing them in, storing them myself, without penalty from the IRS? If not, how about at age 59 ½?

You can take a distribution of the coins themselves (known as a property or in-kind distribution) but that distribution will be treated as if you took a withdrawal of cash. You cannot take the coins out of the Roth IRA and replace them with cash or any other asset that you own. The distribution will be reported to you using the coins’ fair market value and thus subject to the Roth IRA distribution rules that determine whether or not taxes or a 10% early withdrawal penalty is due. 

Roth distributions follow ordering rules. All of your Roth accounts are considered one account. Your annual contributions are the first funds distributed. They are always tax and penalty free. Then conversion amounts are distributed, first in, first out. These distributions are always tax free. They are penalty free if you are over age 59 ½ or if the conversion was done more than five years ago. The last amount distributed is earnings. If you are under age 59 ½, the distribution will be subject to income tax and the 10% penalty. If you are over age 59 ½ AND you have had any Roth account for more than five years or the distribution is due to death, disability, or for a first-time homebuyer, the distribution will be tax and penalty free. If you are over age 59 ½, but have not had any Roth account for five years, then the distribution of earnings will be taxable but no penalty.

The rules are complicated. That is why it is always a good idea to go into a Roth IRA with the mindset that these are funds that you will not touch until you are at least age 59 ½ and have had a Roth IRA for more than five years. When you reach that point, all distributions are tax and penalty free.

I am age 69 ½ and my husband just turned 66.  Does this age difference penalize my husband just because I am older than he is?  If this is true, is there anything we can do to ease the pain of the tax burden this will place on us?  So I guess I need your advice on when our RBD (required beginning date) takes place and when the RMD would have to be calculated. Also when we calculate the RMD, are we required to include both my total Traditional IRA total value and my husband's Traditional IRA value? Would it be possible to file our 2012 taxes separately? 

You will be age 70 this year on September 23, 2013 so you won’t be age 70 ½ until 2014. Your required beginning date (RBD) will be April 1, 2015. Your first RMD will be for 2014. Your IRA custodian will notify you when you need to take your RMD and will calculate it for you upon request. Your RMD is calculated using your IRA (and your age only), not your husband’s. Neither of you will be penalized for the age difference in this case. You must take your RMD amount from your IRA and your husband must take his RMD from his IRA. You cannot satisfy your RMD amount with a distribution from his IRA. You should discuss your tax filing status with your tax preparer.

Have a question for Ed Slott? Please send your mailbag questions to mailbag@irahelp.com and we'll pick several to answer each Friday.

(2) Comments
You should immediately have the IRA titled into an inherited IRA. You can still get the 3% on the (CD?). PLEASE NOTE THAT IF THE FUNDS ARE IN A BANK OR CREDIT UNION AND NOT TITLED AS AN INHERITED IRA THE FUNDS LOSE FDIC OR NCUA INSURANCE 6 MONTHS AFTER DEATH. ALSO PLEASE BE AWARE THAT IRA FUNDS ARE ONLY INSURED FOR UP TO $250,000. YOU CAN TAKE SOME OF THE MONEY AND MOVE IT SOME PLACE ELSE IF YOU WANT. THEN 100% OF THE MONEY WILL BE INSURED IF YOU STAY IN THE BANK OR CREDIT UNION SIDE AND NOT IN THE INVESTMENT SIDE LIKE IN MUTUAL FUNDS ETC. YOU WILL BE ABLE TO TAKE THE RMD OUT OF THE LOWEST PAYING CD AT MOST PLACES BUT CHECK FIRST BEFORE MOVING IT.
Posted by Rosemry S | Friday, February 22 2013 at 9:50AM ET
Please don't move the money yourself. Do a institution to institution transfer ONLY or you will owe taxes on the amount that you take possession of. No 60 day option here like a rollover.
Posted by Rosemry S | Saturday, February 23 2013 at 9:00AM ET
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