Recently, an adviser sent me an email that had an attachment explaining that a named beneficiary was to receive a taxable distribution as a result of the death of the IRA owner. The amount was small — relatively speaking — $38,000. The adviser’s question was:
“Tom, It looks like this company is going to give this guy a 1099-R on the death benefit. Can that be avoided if he transfers the funds to another institution as an inherited IRA (option C) before year end?”
The short answer, which I studiously avoid, is “Yes.”
However, there’s much more going on in the facts and circumstances, which I do want to visit. The beneficiary has a singular opportunity which is now being offered to him, the waiver of the 10% early withdrawal penalty.
A distribution made to a designated beneficiary of an IRA, after the death of the IRA owner, is not subject to the 10% premature withdrawal penalty, regardless of the age of your beneficiary — in this instance, a savings of $3,800.
Also, since a qualified transfer is being considered, it may be presumed that the beneficiary does not have a need for the inheritance, and therein lies the opportunity!
The beneficiary may want to consider a qualified disclaimer of the inheritance and allow the proceeds to pass to his children (if the custodian’s beneficiary form allows), perhaps to help with college or other needs. And of course, he could just gift the monies to his child to use for college, but why utilize some of the lifetime gifting allowance.
To recap, the short answer is “Yes” but there is oh so much more which must be considered. You ‘gotta’ love personal financial planning – it is better than Sudoku!