Q: My husband inherited his sister's 403(b) plan when she died in January 2012. We've read IRS Publication 590, but we cannot find any description of whether sibling inheritance is treated differently from non-spouse individual inheritance. We've heard and read different opinions, but cannot find an IRS explanation. Can you tell us whether different rules apply to the inheritance of a retirement plan from sister to brother?
A: Your husband is his late sister's non-spouse beneficiary.
There's no special rule for siblings. 'Non-spouse' means any heir who was not married to the deceased owner of the retirement account. It's a category that includes blood relatives, friends, and even inanimate beneficiaries like trusts and charitable organizations. (Additional rules apply to non-spouses who aren't also human beings, however.)
Your husband can have his late sister's 403(b) account transfered into an inherited IRA at any bank, mutual fund company, or other financial institution he chooses. There's no tax on the transfer if he does this as a trustee-to-trustee transfer. (For more information, see this earlier post, and this one.)
Make sure the new account is opened as an Inherited IRA. His late sister should still be listed as the owner, while he is listed only as the beneficiary. For example: "Francine Jones IRA (deceased January 4, 2012) for the benefit of Samuel Smith." Only a surviving spouse has the right to transfer an inherited retirement account into an IRA in his or her own name.
Your husband must start taking minimum annual distributions from the IRA no later than December 31 of the year after his sister's death. (Of course, he can take out more if he wants to.) The balance of the account remains tax-deferred.
Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are only addressed online.
(c) Lynn Brenner, All Rights Reserved
