Did You Inherit An IRA? Call The IRA Custodian For Help

By Julie Jason, originally posted on Forbes.com.

If you are the beneficiary of someone’s IRA (individual retirement account), what do you do if the IRA owner dies?

To find out how to handle the deceased owner’s IRA, the key contact is the IRA custodian, the firm that “custodies” the IRA. (You can find the name of the custodian on the IRA statement.)

Timing

Many times, when losing a loved one, it’s not at all clear where to turn for advice, but that’s especially important information to have if action needs to be taken quickly. In the case of an inherited IRA, action may need to be taken before Dec. 31 of the year of death. That action is triggered when the deceased did not withdraw 100% of his or her RMD (required minimum distribution) in the year of death.

If you are the beneficiary, what should you do?

I reached out to Vanguard, which has about 8 million retail clients in the U.S., for some practical advice.

Confusing at First Glance

First, let me share an important insight from Vanguard:

“For many clients inheriting retirement assets, RMDs are new and understandably confusing at first glance. Whether a client is seeking assistance with the change of ownership due to death process, or has questions about RMDs after the transition is complete, we have specialists that can help answer their questions, and resources online to help explain their options in ‘plain talk’ terms.”

Indeed, RMDs for inherited IRAs is a very complex topic.

Where to Find Information

Whether you are a Vanguard IRA client or not, you’ll benefit from reading Vanguard’s RMD Rules for Inherited IRAs page. There you will find descriptions of RMDs and details about RMD calculation methods for inherited IRAs. Likewise, you’ll want to read Fidelity’s procedures at “Inherited IRA: Learn About Your Choices.” These resources will give you some ideas of what to expect. But of course, you will want to follow the procedures of the IRA custodian handling your situation.

Example

Assume you are named beneficiary of a Vanguard IRA of your dad’s, who died earlier this year. If you call an IRA custodian like Vanguard, what happens?

In order to report a death of an IRA owner, a beneficiary needs to identify the decedent’s name, the last four digits of his or her Social Security number, and his or her address of record.

Vanguard, in turn, will attempt to verify that the person has passed away using its own systems, but if it is unable to, it will ask the beneficiary to upload a digital copy of the certified death certificate.

Only then can Vanguard, in its capacity of IRA custodian, begin the process of transferring the deceased owner’s IRA to the beneficiary as an inherited IRA. However, if the beneficiary is a spouse, there is another option — the survivor can treat the decedent’s IRA as his or her own. Don’t do this without the help of your tax adviser.

(Note that in cases where the owner did not name a beneficiary, Vanguard would need to receive notification (Certified Letter of Testamentary) of the person who can act on behalf of the estate.)

Detailed instructions on inheriting a Vanguard account can be found here. Note that once the transfer process begins, the account will be frozen “to protect it from unauthorized activity” until the transfer to the beneficiary is completed.

Final RMD In the Year of Death

Once an IRA owner passes away, Vanguard will guide its IRA clients through the change-of-ownership process to inherit any assets that beneficiaries are entitled to. Then, the beneficiary or beneficiaries can proceed with satisfying any remaining outstanding RMDs of the deceased IRA owner.

Vanguard notes that when someone passes away toward the end of the year, it is possible that the accounts will not be transitioned in time to satisfy the decedent’s remaining RMD for that year. In these situations, Vanguard generally recommends that clients satisfy the remaining RMD as soon as they are able to and work with a tax professional to explain to the IRS why the RMD was not satisfied prior to the year-end deadline. See my last post on this subject, with a discussion of IRS Form 5329 and how to request a waiver of the 50% penalty for missing an RMD.

Multiple Beneficiaries

What if multiple beneficiaries are named by the IRA owner? Vanguard provides individualized service for each beneficiary, so it would be advisable that each beneficiary contact Vanguard. Vanguard offers a special online tool for beneficiaries to answer a few questions, which in turn will help determine if they can complete the process online or will need to consult with a Vanguard specialist.

If there is a remaining RMD for the year of the decedent’s passing, it can be satisfied by one beneficiary or multiple ones, with the beneficiaries determining how best to meet the RMD.

Important Reminder

As always when dealing with complicated issues like RMDs and inherited IRAs, be sure to consult with a tax adviser about the approach you should take given your particular situation. Taxes are unique to the individual.

Questions?

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