Inheritance Roth question

[GRHorn 105]

So I had a distant aunt die recently.  She named my 2 brothers and I as beneficiaries on one of her investment accounts.  It’s a Roth IRA account.  The brokerage is Edward Jones. 

It’s a decent amount and I plan on moving the majority of it to my kids’ 529 plans.  Of course the broker isn’t thrilled about that and they’ve tried to slow it down every step of the way.  The latest is his claim that they can’t distribute the money straight to us, I first have to set up my own account with them where the money will get transferred and then I can withdraw my 1/3.  Somehow that will cost me $130 and some surveys to fill out etc. At this point it’s more about the principle of them not just releasing the funds.  

My question here is, is that true that they cant release it without another account being started?  Is there anyway I can avoid giving the brokerage a single penny?  Thanks. 

[TwiceHorn 30715]

First, as a beneficiary of an IRA of a deceased, you have a couple of options:  straight cash distribution, which is fully taxable as income, or "inherited" or "stretch" IRA, which remains tax sheltered for growth and income, but has required annual distributions based on your life expectancy, and any other distributions are simply taxed as income.  Which is essentially what the 529 would do, but for the required distributions.  Probably beats the tax hit.

Mechanically, I would go to your preferred brokerage, preferably a low/no cost one like Fidelity or Schwab, tell them you want to set up a Stretch IRA, and they will suck the funds out of EDJ.

The latter is the best choice for most.

I don't know if all three of you must elect stretch IRA, or if you can do it on an individual basis.  You must do it within 1 year of the date of death.

 

EDIT:  MIssed the Roth part.  Distributions are not taxable but everything else applies.  There's a third option, which is distribution over five years.

Edited July 2, 2018 by TwiceHorn

[CO Horn 151]

I think with multiple beneficiaries, you can take a lump sum distribution if all beneficiaries want to take a lump sum. If one of the beneficiaries wants to keep the Roth, they need to be split into three IRAs and then you can take lump sum.  Not sure if this is the case, but I thought I remember reading this somewhere. 

[CO Horn 151]

1 minute ago, TwiceHorn said:

First, as a beneficiary of an IRA of a deceased, you have a couple of options:  straight cash distribution, which is fully taxable as income, or "inherited" or "stretch" IRA, which remains tax sheltered for growth and income, but has required annual distributions based on your life expectancy, and any other distributions are simply taxed as income.  Which is essentially what the 529 would do, but for the required distributions.  Probably beats the tax hit.

The latter is the best choice for most.

I don't know if all three of you must elect stretch IRA, or if you can do it on an individual basis.  You must do it within 1 year of the date of death.

Since it is a Roth, distributions are tax-free as long as Roth has been open for five years. 

[TwiceHorn 30715]

Yeah, I missed the Roth part.

 

Still think the stretch is probably the way to go as it's more flexible than 529, but has every other advantage.  That is, tax sheltered growth continues, in a self-managed fund (better probably), and no distribution will ever be taxable, whereas cashing out and putting it in a 529 would make non-education distributions taxable, I believe, which would be a fuck.

Edited July 2, 2018 by TwiceHorn

[CO Horn 151]

21 minutes ago, TwiceHorn said:

Yeah, I missed the Roth part.

 

Still think the stretch is probably the way to go as it's more flexible than 529, but has every other advantage.  That is, tax sheltered growth continues, in a self-managed fund (better probably), and no distribution will ever be taxable, whereas cashing out and putting it in a 529 would make non-education distributions taxable, I believe, which would be a fuck.

Good points. If in a Roth, he would still have to take RMDs. Other benefit for a 529 plan would be if he were in a state that allows a tax deduction for 529 contributions. 

[Bobby Light 76]

I work for a competitor and deal with this every day. Each firm will have its own requirements but in order to take a distribution, it has to be reported under your tax ID and will generate a 1099. This is why they may require you to open your own account first, especially if your aunt's account was invested, even if it's just used to take a full distribution. The fees seem extremely high though. Did they say what they were for? Commissions, closing fees, etc

Unfortunately you are ultimately going to have to follow their rules to get your money. You could try escalating to get fees waived though, not sure how EJ customer service is set up.

[Celery Man 20535]

I thought that you didn’t have to take required minimum distributions with a Roth, but apparently that is just for the lifetime of the owner (for those curious/confused as I was).

[phdhorn 6224]

I just did something very much like you.  My mom died and had a $10K death benefit left to the 3 of us kids.  I had to create an inherited IRA so I could roll my portion over without it being taxed.  I set it up at Vanguard (where I have mutual funds and other crap) and it cost nothing, took like 5 minutes of filling out an online form, waiting about 3 days for it to "clear" Vanguard, then waiting about a week until they sent a form to the company where my mom had the money, to allow the transfer.  It cost nothing.

Now that wasn't from a Roth (you can directly inherit a Roth I believe if the owner bequeaths it to you).  But while I could have just taken the money out, I would have been docked at least capital gains (like 20%).  This way it can sit there and I can get withdrawls tax-free.

She also left us a death benefit annuity (again I got a third).  Every company has slightly different options; I took the 5-year delayed (I can withdraw any amount, any number of times, per year, up value of my share of the annuity).  After 5 years, whatever I haven't withdrawn will be sent to me via check.  I did this because the amount isn't a ton (< $20K) and so I'd rather let it cook a little while longer (i.e. up to 5 years), earning a bit more $$ then I can withdraw it and put it in an interest-earning account.  I also avoided the immediate tax hit for lump sum (I'll pay it later anyway, but can at least let it grow.  If it were enough that say the yearly distributions were > $5K or so, then I'd have done the stretch option (distributed over my life expectancy).  Taxes are on what it earned after being established, not on the total amount in the account (in this case, that means about 1/3 of it is taxable, the other 2/3 not).   

Anyway, yeah it's always a cluster fuck when companies have money to pay out.  They like to keep as much of it as possible, so some companies charge money to set up accounts etc.  But you shouldn't have to pay to set up an "inherited" account.  However it's common to have to establish a "new" account to transfer the money in the future.  I also had to do with with one of my mutuals (they don't allow beneficiaries to a regular mutual fund account, you have to establish what's called a "TOD" (transfer on death) account.  I think it's kind of bogus and redundant, but I guess there's precedence for malfeasance so they do it as a security measure.  I had to set up a "TOD" account in that fund so if I die I can name beneficiaries and transfer the money out of my mutual into this TOD, then they can claim it without going to Probate.  Heh, with Vanguard all I had to do is fill out online forms - no bank medallions, no notaries, no TOD crap, nothing.  Man I like Vanguard.

Try setting it up at Vanguard or some other company you like.  It shouldn't need to cost a dime as far as I know.

 

[midtown 3334]

A lot of half rights, wrongs and misused verbiage above.  When I get a minute Ill try to clarify and correct all the wrong stuff.

[TwiceHorn 30715]

13 hours ago, Celery Man said:

I thought that you didn’t have to take required minimum distributions with a Roth, but apparently that is just for the lifetime of the owner (for those curious/confused as I was).

Yeah, we're talking about inheriting someone else's IRA when you are a beneficiary.  A spouse beneficiary can just make it her(his) IRA.  Rules are different for non-spouse beneficiaries.

[TwiceHorn 30715]

15 hours ago, CO Horn said:

Good points. If in a Roth, he would still have to take RMDs. Other benefit for a 529 plan would be if he were in a state that allows a tax deduction for 529 contributions. 

The distributions could then be added to the 529, to continue tax-sheltered growth, without presumably making it so large that non-education distributions eventually have to be made and taxed, and generating any applicable deduction.

 

Does a 529 have to be funded with "earned income"?  That I don't know, but that may be a limitation on the whole distribute it and stick it in the 529 (assuming the distribution exceeds earned income for that year).

Edited July 2, 2018 by TwiceHorn

[CO Horn 151]

1 hour ago, TwiceHorn said:

The distributions could then be added to the 529, to continue tax-sheltered growth, without presumably making it so large that non-education distributions eventually have to be made and taxed, and generating any applicable deduction.

 

Does a 529 have to be funded with "earned income"?  That I don't know, but that may be a limitation on the whole distribute it and stick it in the 529 (assuming the distribution exceeds earned income for that year).

It does not have to be earned income in Colorado. Not sure about other states.

[kmac30 416]

I just did something very much like you.  My mom died and had a $10K death benefit left to the 3 of us kids.  I had to create an inherited IRA so I could roll my portion over without it being taxed.  I set it up at Vanguard (where I have mutual funds and other crap) and it cost nothing, took like 5 minutes of filling out an online form, waiting about 3 days for it to "clear" Vanguard, then waiting about a week until they sent a form to the company where my mom had the money, to allow the transfer.  It cost nothing.

Now that wasn't from a Roth (you can directly inherit a Roth I believe if the owner bequeaths it to you).  But while I could have just taken the money out, I would have been docked at least capital gains (like 20%).  This way it can sit there and I can get withdrawls tax-free.

She also left us a death benefit annuity (again I got a third).  Every company has slightly different options; I took the 5-year delayed (I can withdraw any amount, any number of times, per year, up value of my share of the annuity).  After 5 years, whatever I haven't withdrawn will be sent to me via check.  I did this because the amount isn't a ton ( $5K or so, then I'd have done the stretch option (distributed over my life expectancy).  Taxes are on what it earned after being established, not on the total amount in the account (in this case, that means about 1/3 of it is taxable, the other 2/3 not).   

Anyway, yeah it's always a cluster fuck when companies have money to pay out.  They like to keep as much of it as possible, so some companies charge money to set up accounts etc.  But you shouldn't have to pay to set up an "inherited" account.  However it's common to have to establish a "new" account to transfer the money in the future.  I also had to do with with one of my mutuals (they don't allow beneficiaries to a regular mutual fund account, you have to establish what's called a "TOD" (transfer on death) account.  I think it's kind of bogus and redundant, but I guess there's precedence for malfeasance so they do it as a security measure.  I had to set up a "TOD" account in that fund so if I die I can name beneficiaries and transfer the money out of my mutual into this TOD, then they can claim it without going to Probate.  Heh, with Vanguard all I had to do is fill out online forms - no bank medallions, no notaries, no TOD crap, nothing.  Man I like Vanguard.

Try setting it up at Vanguard or some other company you like.  It shouldn't need to cost a dime as far as I know.

 

I had to stop reading after paragraph 2. If you have an inherited IRA, the required distributions you get are not tax free. They will be taxed as earned income based on your taxable rates. If you would have taken it all out at one time (10k), it would have been like you making an extra 10k that year. Capital gains are not in this picture.

[Okie State 3687]

I had to stop reading after paragraph 2. If you have an inherited IRA, the required distributions you get are not tax free. They will be taxed as earned income based on your taxable rates. If you would have taken it all out at one time (10k), it would have been like you making an extra 10k that year. Capital gains are not in this picture.

This is my understanding after looking into it a bit recently.

[GRHorn 105]

27 minutes ago, kmac30 said:

I had to stop reading after paragraph 2. If you have an inherited IRA, the required distributions you get are not tax free. They will be taxed as earned income based on your taxable rates. If you would have taken it all out at one time (10k), it would have been like you making an extra 10k that year. Capital gains are not in this picture.

You get taxed even if it was a Roth IRA?  

My accountant is out of the office this week, so I haven't heard from him. 

[CO Horn 151]

10 minutes ago, GRHorn said:

You get taxed even if it was a Roth IRA?  

My accountant is out of the office this week, so I haven't heard from him. 

Roth is not taxed as long as it had been in existence for five years prior to her death.

[kmac30 416]

You get taxed even if it was a Roth IRA?  
My accountant is out of the office this week, so I haven't heard from him. 

Phdhorn was talking about an inherited IRA, not a Roth

[Bobby Light 76]

OP wasn't asking for tax advice, BTW

[52-80 18962]

Just sign it over to my cousin in Lagos he can get it squared up for you

[GRHorn 105]

10 minutes ago, Bobby Light said:

OP wasn't asking for tax advice, BTW

With the accountant out of town, I'll take it though.  Thanks everyone for your help. 

[phdhorn 6224]

2 hours ago, kmac30 said:

I had to stop reading after paragraph 2. If you have an inherited IRA, the required distributions you get are not tax free. They will be taxed as earned income based on your taxable rates. If you would have taken it all out at one time (10k), it would have been like you making an extra 10k that year. Capital gains are not in this picture.

Okey, I did get these a bit mixed up because I was doing both at the same time (annuity and establishing an inherited IRA to roll over the money in my mom's acct to avoid the up front tax hit - and THAT I KNOW was the case but either way the OP's question wasn't about that... sorry for the digression.

Yes, I'm going to have to take out my first RMD by the end of next year (Dec. 31, 2019,), since my mom passed in  for that new inherited IRA I just created.  The withdrawal is of course taxable as a "regular" inherited IRA, although in a Roth inherited, you usually don't get taxed on those! Anyway, even if I took out all the money at once, it wouldn't make a big difference to us, we're in the lower end of a tax bracket and our tax rate isn't going to go up, even if this IRA was $200,000 (which it isn't, lol!).

I was working the annuity along with this IRA, and got a little confused with the processes/rules of the annuity rollover.  Anyway, the annuity distributions are NOT taxable after the amount in the account that is from earnings (vs. the original amount placed in the acct.).  And those withdrawals are front-loaded; that is, the first 1/3 of my account is taxed at my tax bracket rate, the other 2/3 are NOT taxed at all; I get that free and clean.

 

Anyway, the original question was must he go through that broker to pay $$$ to establish a new account to receive the money?  It might be true they can't release it until a new (inherited IRA) acct. is established, I had to do that, too, but I'm pretty sure you can establish an IRA anywhere... I did it at Vanguard and paid ZERO $ to get it created and roll the money over.  I wouldn't imagine this broker didn't have to comply with transferring the $$ over to an inherited IRA not with them.  OP should be able to set one up at the company of his choice and get the $$ rolled over for nothing.

Edited July 2, 2018 by phdhorn