Q: I'm the beneficiary of a deceased IRA owner. I'm 56 years old. If I move this IRA to another company, can I take early withdrawals without paying a penalty? (I know I'll have to pay income taxes.)
Also, what would be the name of the new IRA? -- MA, via email
A: As an IRA beneficiary, you never owe an early withdrawal penalty, regardless of your age. You're right that you'll owe income taxes on the withdrawals, but they'lll be penalty-free.
In fact, there's a penalty if you don't take withdrawals from this account.
When you inherit an IRA, you must start taking minimum annual withdrawals based on your own life expectancy, unless you're the widow or the widower of the account's original owner. (Surviving spouses have alternatives, as I'll explain in a moment.) The deadline for the first required withdrawal is December 31 of the year after the original owner's death.
The IRA must remain in its original owner's name, but you can add your name to the account as its beneficiary.
For example, let's say the IRA belonged to Irwin Green, who died last June, and you are Marvin Rumplemayer. In that case, the IRA should be titled:
'Irwin Green IRA (deceased June 20, 2009) for the benefit of Marvin Rumplemayer.'
A word of warning about moving the IRA to a new company:
Don't take a check that's made out to you! If you do, the whole amount will be taxable. The IRA should be moved in a trustee-to-trustee transfer between the two institutions. If you take the money yourself, you'll trigger income taxes on the entire account.
Usually, a trustee-to-trustee transfer is a routine matter, and you won't have any problem. But occasionally, a custodian won't allow IRA beneficiaries to do trustee-to-trustee transfers. In other words, you can't move that inherited IRA without incurring a big tax bill. They're holding you prisoner.
This is a heads-up for other readers! An IRA owner can always do a trustee-to-trustee transfer. Make sure your IRA custodian gives the same freedom to beneficiaries. If not, move your IRA to one that does.
Okay, what about IRAs inherited by surviving spouses?
If Mary inherits her husband John's IRA, she has a choice: She can keep the account in his name and remain a beneficiary, or she can transfer it into a new IRA in her own name.
If she remains on his IRA as the beneficiary, she doesn't have to start taking minimum distributions until December 31 of the year after John's death or the year in which John would have turned 70 and a half, whichever comes later.
And if she chooses to transfer it into an IRA in her own name, she can postpone taking minimum annual distributions until she turns 70 and a half.
But after she puts the IRA in her own name, she will owe an early withdrawal penalty on money she takes out before she turns 59 and a half. Depending on Mary's financial situation and age, she might opt to keep the IRA in John's name and take penalty-free withdrawals, at least temporarily. (For more about that, see my earlier post, 'How Soon Should a Widow Transfer an Inherited IRA into Her Own Name?')
Comments