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March 6, 2009

Does the absence of the decedent’s name in an inherited IRA, invalidate the inherited IRA?

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Does the absence of the decedent’s name in an inherited IRA, invalidate the inherited IRA?

Question An individual inherited an IRA from his father, and transferred the IRA to an IRA at another firm. However, the IRA to which the transfer was made does not include his father’s name. I understand that as a result (of his father’s name being missing from the registration), the transfer is actually a distribution that is taxable to him when the transfer occurred. Is that true?

Answer

No. It is true that the IRS requires the inherited IRA to include the name of the decedent in the registration, to show that the account once belonged to the decedent. This also serves as a reminder to all stakeholders that the account is an inherited IRA, which means it is likely that the account is not eligible to receive a http://retirementdictionary.com/conrtibution.htm contribution [other than a http://retirementdictionary.com/Direct-rollover.htm direct rollover contribution on behalf of the http://retirementdictionary.com/Beneficiary.htm beneficiary of a http://retirementdictionary.com/Qualified-Retirement-Plan.htm qualified plan, http://retirementdictionary.com/403-b-plan.htm 403(b) account or http://retirementdictionary.com/457-plan.htm 457(b) plan]; and it allows the beneficiary to identify the source of each IRA he or she holds for purposes of figuring the taxation of a distribution from the IRA, including exclusion from current year gross income as an http://retirementdictionary.com/Eligible-rollover-distribution2.htm eligible rollover distribution. But nowhere does it state that the absence of the decedent’s name will result in the http://retirementdictionary.com/Transfer.htm trustee to trustee-transfer being treated as a http://retirementdictionary.com/Distribution.htm distribution.

There are other – more important- elements that makes an IRA an ‘inherited IRA’ or ‘beneficiary IRA’.
These include:
• Coding the account as an inherited IRA for tax reporting purposes. This involves hard-coding the account so that all distributions are reported with a Code 4 in box 7 of IRS http://retirementdictionary.com/1099-plan.htm Form 1099-R.
• Coding the account so that it cannot receive IRA contributions.

Therefore, the first thing you (or the IRA owner) need to do is check with the custodian to determine if:
• The account was coded as an inherited IRA for tax reporting purposes
• The only assets in the account are the assets from any transfers (from the decedent’s retirement accounts).

If the answer is yes in both cases, then all you need to do at this point is show the custodian proof that the assets were transferred (not distributed) from an IRA ( in the name of the decedent) to that IRA, and instruct them to correct the registration to include the name of the decedent.

If the account was not coded as an inherited IRA, and the only assets are in the account are the assets that transferred from the decedent’s IRA, then you need to:
• Provide the custodian with the supporting documentation to show that the assets were transferred (not distributed) from the decedent’s IRA to that IRA
• If any distributions were already taken from the beneficiary’s IRA that were not coded as a ‘death distribution’, instruct the custodian to issue a corrected 1099-R with the correct coding.
• Instruct the custodian to add the name of the decedent to the account registration and code the account as an inherited IRA.

If the assets were commingled with non-inherited IRA assets, then you have a problem and would need the assistance of a retirement plans expert to determine if and what type of corrective measures can be taken.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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