Ask Terry Questions Mom’s IRA distributions at death

Mom’s IRA distributions at death

By Terry Savage on August 16, 2015 |

My mother passed this spring and left me and my children a small Ira approx 3000. My question is are the rules or laws about how we take this money? my children are 21 and 24. We each get a third of this IRA. I am 59 not quite 59-1/2 . Are there any rules or requirements on the distribution f this IRA. Can we take our share and just put it in a savings acct, also my children. Or do we have to take distributions ?? Thanks Elaine

Terry Says:  The answer to this question is so complicated that I will just give you a series of explaining links below.  A lot depends on whether your mother had already started taking required minimum distributions from the account.  And also, I would have to know whether you are “equal” beneficiaries of the IRA — or whether YOU are the beneficiary, and your children (her grandchildren) are secondary  “contingent”beneficiaries with money to be divided if you are not live.  (It seems from your question that you each get a third, but you should make sure of how the beneficiary is named.

The custodian of the IRA account will be instructed, upon receipt of the death certificate, to roll it into a “decedent’s” IRA.   Then, because none of you is a spouse, the money will have to be distributed within five years of the account owner’s death, paying taxes at your ordinary income tax rate.   OR, there is a provision for you to roll it into separate IRAs, and start withdrawals over each of your lifetimes.  But with such a small amount of money involved, that will create a lot of annual paperwork and hassle.  So I suggest that the IRA be distributed from the decedent’s IRA either this year, or next.  Prepare to receive a 1099, to add money to each of your taxes.  (If your children are still in college and needing financial aid, this could impact them negatively– so you might want to postpone distributions until they are out of school, but within the 5 year period.)

Then treat this as a learning experience for your daughters.  This is an unexpected windfall.  And it comes because “Granny” understood the importance of saving.  Perhaps they might want to spend half — and save half.  If they have jobs and are earning money, they could put this money into their own tax-free Roth IRA (most fund companies such as Fidelity require a $1,000 minimum to open).   Or they could pay down student loans.  But stress to them that their grandmother is likely watching from above, and would be very disappointed if they spent her hard-earned savings at the mall!

By the way, here’s a link to the complicated set of rules for IRA withdrawals/rollovers on the death of the owner.

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