Q: I have
just read your advice on moving an inherited IRA by doing a 'trustee to trustee'
transfer. I have no immediate need for
this money, and I think I would like to do this. I've inherited two different accounts that will
total about $20,000. I am 50 years old.
My main question is 'what exactly is trustee to trustee'? Does this mean 'bank
to bank'? If I do this, will the money
be in my name so I can take it out at a later date? --CF via email
A: First things first. Unless you inherited this IRA from your spouse, you can't put the money in your name. The original owner's name must stay on the IRA, with you listed only as its beneficiary.
That doesn't mean you won't be able to take withdrawals. In fact, if you aren't a surviving spouse, you must start taking withdrawals from this IRA by December 31 of the year after the original owner died, even if
you don't need the money.
The bad news is that each withdrawal is taxable income.
The good
news is that you're not required to withdraw more than an annual minimum based on
your life expectancy as it appears on the Internal Revenue Service actuarial table for beneficiaries. If you're 50 years old, your life expectancy is 34.2 years.
Your
annual withdrawal must be based on the total IRA balance. If that total is $20,000,
divide $20,000 by your 34.2 life expectancy ... and your first annual withdrawal is $584.79.
Okay -- what about moving the account?
'Trustee
to trustee' means that the IRA's current custodian transfers the account to a new custodian. The transfer is done between the two companies and the
money never touches your hands, even in the form of a check.
This is the only
way a non-spouse IRA beneficiary can move the account without triggering a tax on it. If the bank gives you a check to deposit in another institution, the whole IRA
automatically becomes taxable.
The IRA custodians don't have to be banks. You can move the IRA from a bank to another bank, or you can move it from a bank to any mutual fund company, stock brokerage, or insurance company.
But wherever you move this money, it must go into an IRA in its original owner's name. Only a surviving spouse gets to put an inherited IRA into his or her own name. If any other beneficiary does that, the account stops being an IRA and becomes ... that's right, immediately taxable.
Here's
how you do a trustee to trustee transfer:
First, you must open a brand-new IRA at Mutual Fund Company X.
Be sure to
ask for the paperwork to open an inherited IRA, and make it clear that
you are not the surviving spouse. (Many IRA custodians automatically hand out
the forms to open an IRA in your own name. That's not what you want!) Fill in
the name of the new IRA: For example, if you inherited Jane Smith's IRA and your name is Catherine Freeman, the account will be 'Jane Smith IRA (deceased December 14, 2009) for the
benefit of Catherine Freeman'.
There's a space on the IRA form to say how you're
going to fund this new account. That's where you say it is to be funded with 100% of the
proceeds of the accounts at Bank A and Bank B. You'll fill in those account
numbers.
You can
invest the IRA in any of the choices offered by Mutual Fund Company X. (And if Mutual Fund Company X has a discount brokerage affiliate -- as Vanguard Group and Fidelity Investments do, for example -- you can invest it in virtually any mutual fund offered by any other company.)
You must recalculate your required
annual withdrawal every year. You'll find the actuarial table --
'Single Life Expectancy Table for Use by Beneficiaries' -- at the back
of IRS publication 590. You can download it here.
Of course, you can take out more than the minimum if you want. Only the withdrawals are taxable; the balance grows tax-deferred.
(c) Lynn Brenner, All Rights Reserved.