Inherited Traditional IRAs

Rev 7/20/2021

Inherited

Traditional

IRAs For Non-Spouse Beneficiaries

After the SECURE Act

8:30am CST or 12:30pm CST

Copyright 2021 © Collin W. Fritz & Associates, Ltd. “The Pension Specialists”

8/30/2021

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Inherited Traditional IRAs for Non-Spouse Beneficiaries

After the SECURE Act

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Traditional IRAs and Roth IRAs

Purpose(s):

An accountholder uses this special savings account to accumulate funds to be primarily

used for his or her retirement and to provide for a beneficiary or beneficiaries after his or

her death.

An IRA is a special tax-preferred revocable trust.

An IRA does not cease to exist because the initial IRA accountholder dies a lump sum

distribution is not required to be paid to the beneficiary.

“Traditional IRAs” means traditional, SEP or SIMPLE-IRAs

Roth IRAs are discussed in another webinar

Overview

Once the IRA accountholder dies, his or her IRA becomes an inherited IRA. This

happens as a matter of a law. The IRA funds will now be used to benefit the

beneficiary(ies) rather than the IRA accountholder. The beneficiary must comply with

beneficiary RMD rules.

Tax Benefits

An inherited traditional IRA is a tax preferred savings and investment allowing the

beneficiary to continue to receive the benefits of tax deferred income and the

compounding of income.

The Inherited Roth IRA in general allows the beneficiary to earn tax-free income for a

certain number of years.

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Contributions

Custodial or Trust Account Earnings within Account are

not Taxed

Distributions

Beneficiaries

Original

Subsequent

In general, the beneficiary will include

the distribution in income and pay tax

but will not owe the 10% tax.

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1. No Annual or Rollover Contribution 2. Transfer-in from decedent’s IRA 3. Transfer from inherited IRA to Another Inherited IRA 4. Direct Rollover in from deceased 401(k) participant


Illustrate – Impact and Purpose of the SECURE Act

Illustration – IRA Owner Dies in 2019 vs. IRA Owner Dies in 2020 or later

1975-2019 A 30 Year old may stretch out distributions for 53 years

2020 or A 30 year old beneficiary must close the inherited IRA under the 10-year

later rule if the decedent IRA owner is more than 10 years older than the

beneficiary.

Tax Benefits of the inherited IRA generally must end much sooner for most beneficiaries.

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The Basic Required Distribution Calculation Under the Life Distribution Rule

to be used by spouse beneficiaries and other EDBs

Yearly Beneficiary RMD = FMV as of 12-31 preceding year

Divisor (Life Expectancy of Beneficiary)

Divisor: In general, based on age of the beneficiary, determined as of the year

following the accountholder’s date of death.

Single Life Table.


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Administrative Duties and Approaches of the IRA Custodian/Trustee

With Respect to an IRA Beneficiary

Duties owed the IRS

Duties owed an IRA Beneficiary

Sources of IRS Guidance

Instructions for Form 5498

Special titling

Completing Box 5 and possibly Boxes 15a and 15b

Not completing Box 11 (RMD box) and Boxes 12a and 12b

No duty to furnish an RMD notice to a beneficiary - Why?

Instructions for Form 1099-R

No special titling required but CWF strongly suggests using special titling Reason Code 4

Form 1099-R is not used to inform anyone that an IRA owner has died

IRS Publication 590-B

IRA Model Forms 5305 and 5305-A or an IRA Prototype

Warning: Anyone who relies on unofficial IRS guidance does so at their own risk

Before Court

In Court

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Administering Inherited Traditional IRAs after the SECURE Act and the CARES Act

First Questions to Ask Once Learning an IRA Owner Has Died

#1. Did the person die before or after their required beginning date

Need to know date of birth and date of death

#2. Did the person die before 2020 or after 2019?

#3. Was an RMD calculated for the year of the death and to what extent has it been

withdrawn either by the decedent or a beneficiary?

#4. Which classification describes the beneficiary?

A. An EDB

A spouse

A non-spouse who is an EDB

A trust which is an EDB

B. Not an EDB, but a person

C. Not a person

An estate

A non-qualifying trust

A qualified trust, but not an EDB trust

An EDB trust

A tax exempt charity

Beneficiary Instruction Form: Put a Beneficiary on Notice –

He or She is Subject to the RMD Rules and Obtain Written Instructions

An excellent way to put a beneficiary on notice of the tax rules and the distribution

options available is to furnish a beneficiary with a “Beneficiary Election of Instruction”

Form. An IRA custodian may want to use a copy of CWF’s Form #204 or Form #206 or

similar form. CWF’s Form #204 or #206 are reproduced on the following pages.

This form will also be used by the beneficiary to instruct how he or she will comply with

the RMD rules.

It should be emphasized to the beneficiary that he or she may well wish to consult with

their legal and/or financial advisor before completing the form.

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Beneficiary Instruction Form: Put a Beneficiary on Notice –

He or She is Subject to the RMD Rules and Obtain Written Instructions

It is important for the IRA beneficiary to clearly document his or her election, if

applicable, and instructions. CWF Form #204 or #206 (Beneficiary’s Distribution Notice

and Certificates Form and Payment Instructions) can be used for this purpose.

Even if the custodian’s/trustee’s first knowledge of the IRA accountholder’s death is the

beneficiary requesting the entire balance of the inherited IRA, it is a good idea to have

the beneficiary complete a special form.

The special distribution instruction will indicate to them that there are more options than

a lump sum distribution.

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CWF’s Beneficiary

Instruction Forms

#204 - Beneficiary’s

Distribution Notice and

Certification Form and

Payment Instruction.

The Beneficiary is a

Spouse or is an Eligible

Designated Beneficiary

(EDB).

#206 - Beneficiary’s



Payment Instruction.

The Beneficiary is not

an EDB or is Subject to

the 10-year Rule.

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CWF’s Form #57

Distribution Form:

Put a Beneficiary on Notice –

He or She is Subject to the

RMD Rules and Obtain Written

Instructions

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• Created as a matter of law

• Copy of Decedent’s last IRA Plan Agreement

• New Inherited IRA Plan Agreement - Recommended

Establishing the Inherited IRA for a Beneficiary

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Traditional IRA Beneficiary

CWF Inherited IRA Plan

Agreement and Disclosure

Statement

Forms:

40-TI Custodial

41-TI Trust

42-TI Custodial Self

Directed

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General Procedures

Once the IRA custodian/trustee knows of the death of an accountholder, we

suggest the following procedure:

• Identify who is the primary beneficiary or who are the primary beneficiaries.

• Set up an inherited IRA file for each beneficiary. You will want to put a copy of the

deceased accountholder’s IRA plan agreement and beneficiary designation in this

file along with the other documents discussed herein.

• Send a letter to each named beneficiary. The letter should inform the beneficiary

that you will need to be furnished a certified death certificate (or a similar legal

document) as evidence of the accountholder’s death. The letter should also inform

the beneficiary that certain elections will need to be made as to how and when his

or her share is to be paid. A Form #204 or similar form should be enclosed.

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General Procedures (continued):

• Retain a copy of the death certificate in the file.

• Retain a copy of the elections and the instruction for a distribution schedule.

Determine if some beneficiaries will not be beneficiaries for RMD purposes. Set up

procedures to annually monitor these distributions for correctness as to amount

and as to timeliness.

• Document the distribution(s) so that you are preparing the Form 1099-R correctly.

• Make sure that there is compliance with the withholding rules.

• Allow each beneficiary to designate his or her own beneficiary(ies)

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Understanding the Policies and Procedures To Pay Out to a Beneficiary

As Set Forth in the IRA Plan Agreement

The IRA custodian/trustees must understand what its IRA plan agreement states are

the policies and procedures applying to required distributions. Set forth below is what

CWF’s IRA plan agreement states.

1.7 Special Distribution Rules to Ensure Compliance with Required Minimum

Distribution Rules by Beneficiaries and Special Provisions for Inherited IRAs.

You agree to inform any person who is your beneficiary that he or she is your

beneficiary and he or she must inform us of your death. We have the right to require

that your beneficiary(ies) furnish us with a certified copy of your death certificate or

other documentation as we feel appropriate to verify your death.

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After your death, there are rules which mandate that your IRA funds be distributed to

your beneficiary(ies) on or before certain time deadlines. The time deadlines which

apply will depend upon whether you died before or on/after your required beginning

date and which available option your beneficiary elects. These deadlines are explained

in the Disclosure Statement portion of this IRA book.

Upon your death, your IRA will be converted into one or more inherited IRAs. The

number of inherited IRAs to be created depend upon the number of your primary

beneficiaries alive as of the date of your death. There will be an inherited IRA created

for each beneficiary.

The following rules will govern such inherited IRAs. These rules are in addition to the

other rules of this agreement and will govern if there is a conflict.

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You agree that we have the right to establish an inherited IRA account for each

beneficiary on our data processing system even before a beneficiary instructs us how he

or she will take the withdrawals. We will have the authority to move the funds from your

IRA to one of more new inherited IRA accounts. We will have the right, if necessary,

because of data processing or administrative requirements to surrender the savings and

time deposits which comprised your account and establish new ones for the inherited

IRAs.

We will transfer an inherited IRA to another IRA custodian or trustee, but only if the

requesting beneficiary and the receiving IRA custodian/trustee will furnish us with a

special transfer of inherited IRA administrative form so it clearly acknowledged that it is

an inherited IRA which is being transferred. Inherited IRAs are not eligible to be rolled

over unless the beneficiary is a spouse. He or She need not be the sole beneficiary to

receive a distribution from the deceased spouse’s IRA.

Each beneficiary will be required to instruct us in writing as to how he or she will

withdraw funds from his or her inherited IRA so that the required minimum distributions

rules will be satisfied.

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A Spouse beneficiary will be deemed to have elected the life-distribution rules unless

he or she expressly elects the five-year rule on or before December 31 of the year

following the year of your death. A non-spouse beneficiary will also be deemed to

have elected the life-distribution rules unless he or she expressly elects the five-year

rule on or before December 31 of the year following your death.

We have forms available which can be used by your beneficiary to instruct us which

option he or she elects and to establish a distribution schedule. Alternatively, the

beneficiary may elect to use the alternative certification method. The beneficiary must

furnish us a written notice of his or her intent to use the alternative certification

method. We will furnish the beneficiary a form which can be used to make this

election, upon his or her request.

We shall have the authority but not the duty to distribute any required minimum

distribution to your beneficiary(ies). Any beneficiary shall be solely responsible to

make sure that the required minimum distributions take place on a timely basis.

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Set up the Inherited IRA for Each Inheriting Beneficiary

An inherited IRA will be titled, “John Doe as the IRA beneficiary of Jane Doe.”

You will want to put a copy of the decedent’s IRA plan agreement and the beneficiary

designation into this file. If a deceased accountholder has more than one beneficiary,

then there will need to be an inherited IRA set up for each beneficiary. Each beneficiary

will individually have to comply with the RMD rules.

You may also want the inheriting beneficiary to sign a new inherited IRA plan

agreement. This is certainly necessary if the funds are being directly rolled over by a

non-spouse beneficiary from a 401(k) plan or similar plan to an inherited IRA.

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Establishing Inherited IRAs/Inherited Plan Agreements

CWF has created IRA plan agreements specifically for inheriting beneficiaries. As you

know, the rules for beneficiaries differ considerably from those of the original

accountholder. A financial institution normally handles a beneficiary situation by merely

placing the original plan agreement, or a copy of it, in the beneficiary’s file. In an

amending situation, it is confusing as to how to amend the plan agreement. Normally

amending would still be geared toward only the original accountholder.

CWF believes it would simplify things for the financial institution, and the rules would be

more clearly understood by the beneficiaries, if the plan agreement detailed the rules as

they apply to beneficiaries.

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Establishing Inherited IRAs/Inherited Plan Agreements

An inherited IRA plan agreement highlights important beneficiary issues, such as the

ability of a beneficiary to, in turn, designate their own beneficiary(ies), the various

distribution options and required beginning dates, and the deadline to change from a 5-

year rule to the life-distribution rule. These are important issues of which beneficiaries

must be made aware to enable them to make informed decisions concerning their

inherited account. These issues are not thoroughly explained in the plan agreement

which the original accountholder would have signed. We at CWF believe this is a

valuable product to aid your financial institution in providing excellent customer service

by helping your staff and accountholders understand the special rules which apply to

beneficiaries.

There are inherited traditional IRAs and inherited Roth IRAs.

Sample Inherited IRA Application (See next page)

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CWF 40TI

Inherited IRA

Custodial Account Application

Form 5305-A

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CWF40TI

CWF 41-TI

Inherited IRA

Trust Account Application

Form 5305

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CWF 42-TI

Inherited IRA

Self-Directed Custodial

Account Application

Form 5305-A

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Designation of a Beneficiary(ies) by the Inheriting Beneficiary

May an “inheriting” IRA Beneficiary designate a beneficiary(ies) of his or

her share? Yes, the 1987 RMD rules generally prevented a beneficiary from

designating a beneficiary; the 2002 rules allow such designation. You will want to check

to see that your IRA plan agreement has been revised to authorize this. For example,

CWF’s Form 40-T at section 1.6 provides:

Naming Beneficiaries and Methods of Payment. You may name one of more

beneficiaries to receive your IRA assets after your death. We require that you use our

beneficiary form to designate your beneficiary or beneficiaries and that you sign this

form and file it with us during your lifetime. You are deemed to have furnished us with

your beneficiary designation if you furnished such a form to an entity with respect to

which we are considered to be a successor custodian and we have such designation in

our files. You may change your beneficiaries at any time, and the consent of a

beneficiary is not required unless you reside in a state with community or marital

property laws. When you sign a new beneficiary form, you revoke all prior beneficiary

designations. If you don’t name a beneficiary, or none of the name beneficiaries are

alive on the date of your death, your IRA assets will be paid to your estate.

Researching state law.

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Designation of a Beneficiary(ies) by the Inheriting Beneficiary

As the beneficial owner of the IRA assets, you can instruct how and when these assets

will be paid to the beneficiaries. If you don’t instruct, your beneficiaries will have the right

to choose how and when the assets will be paid. Any method of payment must satisfy the

provisions of Article IV and other governing law.

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After your death, each primary beneficiary who acquires an interest in your IRA shall

have the right to designate his or her own beneficiary(ies) with respect to his or her

share. The procedures for designating a beneficiary(ies) which apply to you as the

accountholder shall also to your beneficiary. When a beneficiary signs a new or

revised beneficiary designation form, your beneficiary revokes all of his or her prior

beneficiary designations. If the beneficiary doesn’t designate his other

beneficiary(ies), or if a designated beneficiary is not alive when the beneficiary dies,

then the remaining IRA assets will be paid to such beneficiary’s estate.

Any method of payment must satisfy the provisions of Article IV and other governing

law.


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Timing Considerations – When is a beneficiary required to take an RMD ?

Distribution, if any, due for year of death.

a. If the decedent dies before his or her 72 year, then there is no required distribution for

the beneficiary to take for the year of death.

b. If the decedent died during the year he or she attained or would have attained age 72

or the following year, but before his or her required beginning date and the

beneficiary is a spouse beneficiary, then the RMD for such year must be distributed to

the surviving spouse beneficiary to the extent not distributed to the decedent prior to

his or her death. For a non-spouse beneficiary no distribution is required.

c. If the decedent died on or after his or her required beginning date, then his or her

RMD for such year must be distributed to the beneficiary to the extent not distributed

to the decedent prior to his or her death.


What Rules Apply When the IRA Accountholder Dies

• on or after required beginning date ?

• RMD for year of death must be distributed to the beneficiary(ies) to the

extent not paid to the decedent by December 31 of such year.

• If the entire RMD has been paid, then there is no remaining RMD for the year

of death needing to be distributed.

If the entire RMD had not been paid to the decedent prior to his or her death,

then a beneficiary must be paid his or her share of the remaining RMD by

December 31 of that year.

• The non-spouse beneficiary will need to be paid his or her proportionate

share of the RMD by December 31, or the 50% tax will apply unless the IRS

would waive.

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IRS Guidance in Publication 590-B The IRS first issued the 2020 version of Publication 590-B on March 25, 2021. The IRS issued its revised version on May 13, 2021. We at CWF are unaware that the IRS has furnished any explanation why the March version needed to be changed. We understand sometimes the change was a clarification and sometimes the change was made to correct a mistake. The IRS like most of us hates to admit when a mistake has been made. We still believe there are errors which the IRS needs to revise, correct and explain further. Set forth below is a side by side comparison from the March 25, version and the May 13 version of some of the provisions which were changed. The most valuable point to be understood from the IRS' revised guidance in Publication 590-B is that a beneficiary of an IRA owner who died after their required beginning date must use the 10-year rule to close the inherited IRA unless the beneficiary would be an EDB. That is, even though the IRA owner died after their required beginning date and had commenced a periodic distribution schedule, the non-spouse beneficiary will be required to close the inherited IRA under the 10 year rule. In the April issue we stated incorrectly that we believed the revised example as set forth on page 12 supported the position that once an IRA owner had reached their required beginning date that the beneficiary could continue that schedule by using their single life expectancy factor. We were incorrect because the beneficiary in revised Example #1 was an EDB entitled to use the life distribution rules because he was age 65 and the deceased IRA owner was 74. He was an EDB because he was not 10 years younger. The IRS could clarify its guidance by having a second example where the beneficiary was age 60. That beneficiary would be required to use the 10-year rule. The side by side discussion -

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IRS Guidance in Publication 590-B

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CWF’s discussion. The IRS changed example #1. The March version had a father as the IRA

owner and a son as the beneficiary. The May version has the IRA owner die in 2020 after his

required beginning date, but his brother beneficiary is not more than 10 years younger so he is

an eligible designated beneficiary. He is entitled to use the life distribution rule.

The IRS made no change to Example #2. The IRA owner died after his required beginning

date with his estate as the beneficiary. One would think the 5-year rule applies, but the IRS

indicates the special life distribution rule is used. This guidance is confusing. The IRS should

provide further guidance.

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CWF’s discussion. The IRS changed very little in the two versions. The IRS realized it

had included in the March version the same paragraph twice. The IRS does discuss the

rule if the owner died before 2020 and if the IRA owner died after 2019. In both versions

the IRS makes a statement we believe is wrong.

The IRS states, “the 5-year rule generally applies to all beneficiaries if the owner died in

a year ending before 2020. This statement is wrong. Most IRA forms provide the

beneficiary will use the life distribution rule unless they elect to use the 5-year rule.

The IRS also states, the 5-year rule generally applies to beneficiaries who are not

individuals if the owner died in a year ending after 2019. This statement is inconsistent with

Example #2 as discussed above and the statement in C that the 5-year rule never applies

if the IRA owner died on or after his or her required beginning date.

IRS Guidance in Publication 590-B

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Most IRA beneficiaries of IRA owners dying on of after January, 2020, must close the

inherited IRA by using the 10-year rule. No longer may such a beneficiary use the life

distribution rule. These beneficiaries are called non Eligible Designated Beneficiaries (EDB).

This shorter withdrawal period will mean that traditional IRA, SEP-IRA and SIMPLE-IRA

beneficiaries that they will be required to include in the incomes larger distributions sooner

than previously was required. This shorter withdrawal period will mean for Roth IRA

beneficiaries that the period of tax-free income has been drastically reduced. Under the 10-

year rule, the inherited IRA must be closed by the December 31 of the year containing the

10th anniversary of the IRA owner's death. Such withdrawals may either be periodic or non-

periodic. If this IRA beneficiary dies this 10-year period, the any subsequent beneficiary will

also be subject to this same 10-year period.

What rules apply if the beneficiary is not an EDB ?

The 10-Year rule applies. The rules, however, change for non-spouse beneficiaries. The

general rule is, a non-spouse beneficiary must use the 10-year rule. The 10-year rule

replaces the 5-year rule. The life distribution rule no longer may be used by a non-spouse

beneficiary. This includes a beneficiary which is a qualified trust, a nonqualified trust, an

estate on any other non-living entity such as a charity. The general tax rule is, your non-

spouse beneficiary may structure distributions over this 10-year period as he or she

chooses, and the beneficiary will include these distributions in their income except to extent

that a portion of the distribution is the withdrawal of basis.

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38 So, if you die on or after January 1,2020, and your beneficiary is not your spouse, then your

IRA must be closed by December 31 of the year containing the 10th anniversary of your

death. The beneficiary is no longer eligible to stretch out distributions over the beneficiaries

life expectancy. A non-spouse beneficiary does not have the right to elect to treat your

inherited IRA as his or her own IRA and he or she cannot take a distribution and then make

a rollover contribution. A non-spouse beneficiary does have the right to transfer an inherited

IRA to another IRA custodian/trustee unless you have imposed a restriction preventing such

a transfer.


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Two administrative Classifications

1. IRA Owner Died before 2020

2. IRA Owner Died after 201 9

Four Beneficiary Classifications

1. IRA Owner died before January 1,2020.

These beneficiaries are grandfathered. A beneficiary using the life distribution rule will

continue to do so. Included spouse.

2. IRA owner died on or after January 1, 2020 and the beneficiary is an EDB.

A spouse is an EDB.

3. IRA owner died on or after January 1, 2020 and the beneficiary is NOT an EDB.

4. IRA Owner died on or after January 1, 2020 and the Beneficiary is NOT an EDB and the

beneficiary is not a person - Estate, Charity or a trust.

CWF Note. SECURE Act law changes do not affect a spouse beneficiary. A surviving spouse

beneficiary almost always wants to elect as own or roll over the inherited accounts.

The IRS may be changing certain rules for a spouse beneficiary.

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Classification #1

IRA Owner died before January 1,2020.

These beneficiaries are grandfathered. A beneficiary using the life distribution rule will

continue to do so. Includes spouses.

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Additional Rules and Discussion

1. A spouse beneficiary always has the right to take a distribution from the inherited IRA as

long as the standard rollover rules are met by the surviving spouse.

2. Upon the death of any beneficiary using the life expectancy rule who is alive on

December 31, 2019, but who dies on or after January 1, 2020, the 10-year rule applies to a

subsequent beneficiary who is a person and the 5-year rule applies to any other

non-person beneficiary.

3. The IRS will need to provide guidance on the following situation. If the IRA owner died prior

to January 1, 2020, and the trust is qualified and the trust beneficiary who is the measuring

life dies on or after January 1, 2020, then the IRS will need to provide guidance – the same

distribution period continues to apply to the trust or the trust

will then be required to comply with the 10-year rule.

*4. If the life distribution rule is being used and the IRA beneficiary is older than the

deceased IRA owner, then the RMD divisor is based on the age of the deceased IRA owner

and not that of the beneficiary. The divisor for the first year after the year of death is the

divisor for the year of death less 1.0. And then 1.0 is subtracted for each subsequent year.

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Classification #2 - #4. IRA Owner Dies After 2019

2. IRA owner died on or after January 1, 2020 and the beneficiary is an EDB.

A spouse is an EDB.

3. IRA owner died on or after January 1, 2020 and the beneficiary is NOT an EDB.

4. IRA Owner died on or after January 1, 2020 and the Beneficiary is NOT an EDB and the

beneficiary is not a person - Estate, Charity or a trust.

CWF Note. SECURE Act law changes do not affect a spouse beneficiary. A surviving spouse

beneficiary almost always wants to elect as own or roll over the inherited accounts.

The IRS may be changing certain rules for a spouse beneficiary.

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Who is an EDB?

It is a person or a trust which is described below and meets one of the following requirements:

1. A spouse beneficiary

2. The person is disabled as defined in Code section 72(t);

3. The person is chronically ill,

4. The person is not more than 10 years younger than the IRA grantor or accountholder;

5. The person is a minor child of the IRA grantor or accountholder; or

6. A trust which meets the following three requirements: the trust must have multiple beneficiaries, there must be at least one

beneficiary who is disabled or chronically ill, and all beneficiaries of the trust must be considered for determining the RMD

distribution period. If these three requirements are met, then the RMD distribution provisions of the trust may be structured in

one of two ways .

First, upon the death of the IRA owner, the trust is divided immediately into separate trusts for each beneficiary. There is to be

a separate life distribution rule calculation for each beneficiary who is disabled or chronically. It is not clear what calculation is

to be made for other beneficiaries.

Second, upon the death of the IRA owner, the trust must. provide that only a beneficiary who is disabled or, a beneficiary who

is chronically ill is entitled to be distributed such trust funds. Other beneficiaries may be distributed such funds only after all

such eligible designated beneficiaries have died. However, in that situation any remaining beneficiary (not an eligible

designated beneficiary) shall be treated as a beneficiary of the eligible designated beneficiary.

A special rule applies to a minor child who is an EDB. Upon attaining the age 18, the person is required to close out the

inherited IRA under the 10-year rule.

IRA Owner died on or after January 1, 2020

and the beneficiary is an EDB.

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Limited New RMD Rules For IRA beneficiaries Who are EDBs of IRA Owners Who Died

On of After January 1,2020.

Certain beneficiaries are not required to use the 10-year rule even though the IRA owner dies

in 2020 or a subsequent year. These beneficiaries are Eligible Designated Beneficiaries

(EDB). These beneficiaries, in general, are still subject to the pre-2020 rules. That is, when

applicable, the life distribution rule may still apply.

To be an EDB the beneficiary must be one of the following:

1. A beneficiary who is disabled;

2. A beneficiary who is chronically ill;

3. A beneficiary who is not more than 10 years younger than the IRA owner;

4. A child;

5. Certain trusts;

The life distribution may be used to calculate the RMD for an EDB, if applicable. A beneficiary

is allowed to withdraw a distribution exceeding their RMD. However, if this IRA beneficiary dies

during the life distribution period, then his or her subsequent beneficiary is not permitted to

continue this schedule, but must close the inherited IRA under the 10-year rule.

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What rules apply if the beneficiary is an EDB? The Pre-2020 Rules Apply. Who is an EDB? There are five exceptions to the non-spouse beneficiary general rule. That is, the pre-2020 rules continue to apply to the following non-spouse beneficiaries even when the IRA owner has died on or after January 1, 2020. Certain non-spouse beneficiaries are still able to use the life distribution rule. 1. A beneficiary who is disabled as defined for IRA and pension plan purposes. 2. A non-spouse beneficiary who is not more than 10 years younger than the deceased IRA. For example, Jane age 65 and designated her brother John age 58 as her primary beneficiary. Another example, Julie age 52 designates her brother Raul age 47 as her primary beneficiary.

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3. A beneficiary who is a child of the IRA owner who as not reached the age of majority. This exception is limited. Once the child attains the age of majority, she or will have 10 years in which to close the inherited IRA. In most states, the age of majority is age 18. Unless the IRS issues further guidance, a grandchild or great grandchild is not an EDB. 4. A beneficiary who is chronically ill. A certification must be provided showing a period of inability that is an indefinite one and which reasonably is expected to be lengthy. 5. A beneficiary which is a trust which meets certain special rules. These rules are not the rules that must be met under pre-2020 rules to have a qualified trust. First, the trust must have multiple beneficiaries. Second, the trust must have at least one beneficiary who is either disabled or chronically ill. Third, all of the beneficiaries are treated as designated beneficiaries for purposes of determining the distribution period.

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There is a special rule for a beneficiary who is a minor. The minor uses the life distribution rule to calculate his or her RMD while a minor, but upon attaining the age of majority must switch to the 10-year rule. For example, Jane Doe designated her son, Mark, to be her IRA beneficiary. Jane Doe was 37 when she died in 2020. Her son was then age 10. He will attain age 18 in 2028. The 10-year rule then applies. He must close the inherited IRA by December 31, 2038. In general, in order for a trust to be able to use the life-distribution rule to calculate its RMD, the trust must have at least one beneficiary that is either disabled or chronically ill. These trust rules are complicated. A person should consult with an experienced tax advisor.

48

The Basic Required Distribution Calculation Under the Life Distribution Rule

to be used by spouse beneficiaries and other EDBs

Yearly Beneficiary RMD = FMV as of 12-31 preceding year

Divisor (Life Expectancy of Beneficiary)

Divisor: In general, based on age of the beneficiary, determined as of the year

following the accountholder’s date of death.

Single Life Table.

49


50

50

51

51

52

Example of how the new tables will be used for 2022 Jane Doe an IRA owner, died in 2012 at age 77. Her beneficiary was her son,

Mark, whose date of birth is 2/17/70. He was age 43 in 2013. The divisor which

applies for 2022 will be 33.9. The initial divisor of 40.7 for 2013 is replaced by

42.9 and the revised schedule applies to 2022 and subsequent years.

Original RMD Schedule Revised RMD Schedule

2013 40.7 42.9

2014 39.7 41.9

2015 38.7 40.9

2016 37.7 39.9

2017 36.7 38.9

2018 35.7 37.9

2019 34.7 36.9

2020 33.7 35.9

2021 32.7 34.9

2022 31.7 33.9 X

Determining the Period/LE Factor (for situation # 1)

This same schedule is used for subsequent beneficiary(ies)

once the original beneficiary dies.

53

Beneficiary Factor

Year of Death 2021 40 N/A

1 2022 41 44.8

2 2023 42 43.8

3 2024 43 42.8

4 2025 44 41.8

5 2026 45 40.8

Example: The IRA Accountholder dies on 9-15-2021 at the age of 65, before her RBD.

Jane Doe is the only primary beneficiary. She is an EDB. She is age 40 in 2021 and will

be age 41 in 2028. The initial factor comes from the single life table and then subsequent

factors are determined by subtracting 1.0 for each following year.


Special Rule When Beneficiary is Older than the IRA Accountholder

Example: Jack, age 72 dies in 2021. His IRA beneficiary is his sister (i.e. a non-spouse),

Marcy, age 74. The required minimum distribution for 2021 is based on the age Jack would

have attained had he lived all of 2021, using the Uniform Lifetime Table.

Starting in 2022, the year after the death, Marcy’s RMD will be calculated using Jack’s age

in 2021 as modified and not her own.

The worksheet on the next page will illustrate the special calculation needed.

54


Special Traditional IRA Beneficiary RMD Calculation -

IRA Accountholder Dies ON or AFTER the RBD and

• IRA Accountholder is younger than the non-spouse beneficiary

55

Example: Decedent Age 72 Beneficiary Age 74

Year Factor Year Factor

___________________________________________________________

Year of Death 2021(72) 17.2 2021(74) N/A

2022 16.2* 2022(75) 14.8

2023 15.2* 2023 13.8

2024 14.2* 2024 12.8

* Applicable Factor

Note: Decedent’s Life Expectancy Factor is used


Decedent/Beneficiary Life Expectancy Comparison Calculation Exception

This exception only applies when the IRA accountholder has died on or after his or her

required beginning date. In addition, for this to apply, the deceased IRA accountholder

must be younger than the beneficiary.

Section 1.401(a)(9)-5 Q&A 5 of the Regulations under the Internal Revenue Code

provides that if the IRA owner dies on or after his/her required beginning date, the

distribution calendar years after the distribution calendar year containing the IRA owner’s

date of death is the longer of:

1. The remaining life expectancy of the IRA owner calculated in the year of death and

reduced by one for each subsequent year; and

2. The remaining life expectancy of the non-spouse beneficiary calculated in the year

AFTER year of death and reduced by one for each subsequent year.

56


57

IRA owner died on or after January 2020 and the beneficiary is not an EDB,

But is a person or a qualified trust

The 10-year rule applies

The Beneficiary is NOT and EDB. This will be the general situation applying to most children of

the deceased owner.

If the beneficiary died before the 10-year period has expired, the subsequent beneficiary will

complete the 10-year schedule.


Classification #3

58

What is the 10-Year Rule

The IRA beneficiary must take sufficient distributions to close the inherited IRA by

December 31 of the 10th year containing the Anniversary of the accountholder’s

death. There is no requirement to take out any specific amount in any year. In

actuality, the beneficiary is allowed eleven calendar years to take his or her RMDs.

Year Sched #1 Sched #2

Sched #3

Sched #4

Sched #5

Year of Death

Subsequent

Years

2021 0% 0% 10% 20% 100%

1 2022 10% 0% 10% 20% N/A

2 2023 10% 0% 0% 20% N/A

3 2024 10% 0% 30% 20% N/A

4 2025 10% 0% 0% 20% N/A

5 2026 10% 0% 15% N/A N/A

6 2027 10% 0% 5% N/A N/A

7 2028 10% 0% 15% N/A N/A

8 2029 10% 0% 15% N/A N/A

9 2030 10% 0% N/A N/A N/A

10 2031 10% 100%

N/A N/A N/A

Total 100% 100% 100% 100% 100%

The inherited IRAs

must have a zero

balance by 12/31/31 if

the accountholder dies

in 2021.

59

CWF’s Revised

Beneficiary

Instruction Form

204 - Beneficiary’s



Payment

Instruction. The

Beneficiary is a Spouse

or is an Eligible

Designated

Beneficiary (EDB).6

206 - Beneficiary’s



Payment

Instruction. The

Beneficiary is not an

EDB or is Subject to the

10-year Rule.

60

See discussion. The IRS has given some indication the special life distribution rule applies

when the IRA owner dies after their required beginning date.


Classification #4

60

6161 What is the 5-Year Rule or option ?

1. Applies when the IRA owner died before the required beginning date and the IRA owner died

before 2020.

2. Applies when a beneficiary is not a person.

The IRA beneficiary must take sufficient distributions to close the inherited IRA by December 31 of

the fifth year containing the Anniversary of the accountholder’s death. There is no requirement to

take out any specific amount in any year. In actuality, the beneficiary is allowed six calendar years to

take his or her RMD’s.

Schedule #

1

Schedule #

2

Schedule #

3

Schedule #

4

Schedule #

5

Year of

Death

2021 0% 0% 0% 100% 0%

1 2021 20% 0% 0% 0% 50%

2 2022 20% 0% 0% 0% 0%

3 2023 20% 33.3% 0% 0% 0%

4 2024 20% 33.3% 0% 0% 50%

Remainder

5 2025 20%

Remainder

33.3%

Remainder

100%

0% 0%

The inherited IRA must have a zero balance by 12/31/2024 if the accountholder died in 2019.

Special CARES Law if IRA owner died before 2020.

Inherited IRAs for Non-Spouse Beneficiaries

61

62

Discussion of RMD Rules for Trusts

1. Non-qualified Trust – 5-year rule or special life distribution rule

2. A qualified trust

3. An EDB trust


62

63

Rules for an EDB Trust

Most trusts will not qualify as EDB. A qualified trust may not be an EDB trust. A

person who has currently designated a trust as a beneficiary may well wish to

change their designation and ASAP.

The EDB trust rules are complicated

3 Requirements

1. Multiple Beneficiaries

2. One of the beneficiaries must be disabled or chronically ill

3. There are two ways the trust may be structured


63

64 The IRA Distribution Changes Two Requirements to be Met for a Trust to Qualify as an EDB First, upon the death of the IRA owner, the trust is divided immediately into separate trusts for

each beneficiary. There is to be a separate life distribution rule calculation for each

beneficiary who is disabled or chronically. It is not clear what calculation is to be made for

other beneficiaries.

Second, upon the death of the IRA owner, the trust must provide that only a beneficiary who

is disabled or a beneficiary who is chronically is entitled to be distributed such trust funds.

Other beneficiaries may be distributed such funds only after all such eligible designated

beneficiaries have died. However, in that situation any remaining beneficiary (not an eligible

designated beneficiary) shall be treated as a beneficiary of the eligible designated beneficiary.


64

D. Definition of a Qualified Trust

Considerations When A Qualified Trust Is the Inheriting Beneficiary

There is a special rule for certain trusts. There is no special rule for an estate. The

special rule is that the beneficiary(ies) of a qualified trust will be treated as the

beneficiary(ies) of the IRA for calculating the applicable distribution period in the RMD

calculation, if the following requirements are met:

• The trust is a valid trust under state law, or would be but for the fact that there is

no corpus.

• The trust is irrevocable or will, by its terms, become irrevocable upon the death of

the IRA accountholder. Since the accountholder is deceased, the trust must be

irrevocable for this exception to apply to the beneficiary.

• The beneficiaries of the trust who are beneficiaries with respect to the IRA are

identifiable from the trust instrument.

• The required documentation has been provided to the IRA custodian or trustee.

The documentation to be provided depends upon whether the required

distributions are occurring before the IRA accountholder has died or after the

accountholder has died.

• The trust must have as its beneficiaries only living persons

65


There are also two ways to meet the documentation requirements when an RMD must

be paid to a trust beneficiary after the accountholder has died. This requirement must be

met by October 31 of the year after the year the accountholder has died.

1. The trustee of the trust provides the IRA custodian/trustee with a copy of the trust

instrument for the trust that is the designated IRA beneficiary as of the IRA

accountholder’s date of birth.

2. The trustee of the trust provides the IRA custodian/trustee with the following:

a. A final list of all the beneficiaries of the trust as of September 30 of the year

following the year of the accountholder’s death. This list must include all

contingent and remainder main beneficiaries with a description of the conditions

of their entitlement.

b. A certification that the list is correct and complete and that the first three trust

requirements discussed above have been met:

c. An acknowledgment that he or she will provide a copy of the trust instrument

when requested by the IRA custodian/trustee

66


Definition of a Designated Beneficiary

Is a Qualified Trust Beneficiary Able to Use the 10-Year Rule or Must it Use the 5-Year Rule? Until the IRS gives guidance to the contrary, my answer is, the trust may use the 10-year rule.

However, this memorandum is being furnished because the law is certainly not settled. An

IRA trustee must wait to see what guidance the IRS issues. The position of an IRA trustee is

difficult until the IRS provides needed guidance. Clearly the goal of the SECURE Act was to

shorten the distribution period for many non-spouse beneficiaries in order to increase tax

revenues. The votes in the House and the Senate were nearly unanimous. Most non-spouse

beneficiaries must now use a 10-year rule rather than being able to use the life distribution

rule which had formerly applied.

The 10-year rule applies only if the beneficiary is a designated beneficiary. The 5-year rule

applies to a beneficiary which is not a designated beneficiary. In order to be a designated

beneficiary the Code requires the beneficiary be a person. Obviously a trust is not a person.

This same requirement applied prior to the SECURE Act for 2002-2019.

Most trust professionals (N. Choate and others) have concluded that a qualified trust which

has been designated as an IRA or a pension beneficiary is eligible to use the 10-year rule and

not the 5-year rule to close the inherited IRA. Why? They believe the SECURE Act did not

change the definition of a designated beneficiary. What is the authority for this position? Code

section 401 (a)(9) sets forth the law applying to beneficiaries, including the definition of who is

a designated beneficiary. Again, in order to be a designated beneficiary the Code requires

the beneficiary be a person. These RMD laws require a beneficiary to close an inherited IRA

within certain time deadlines. There are laws when the beneficiary is a person and there are

laws

67


Is a Qualified Trust Beneficiary Able to Use the 10-Year Rule or Must it Use the 5-Year

Rule?

When the beneficiary is not a person. These laws differ. Prior to 2020 the general rule was

that a beneficiary who is not a person had close the inherited IRA under the 5-year rule

whereas a beneficiary who is a person was authorized to use the life distribution rule.

The IRS in writing its 2002 regulation created a special tax rule for certain trusts so that such

trusts would not be required to use the 5-year rule. In 2002 the IRS clearly presented the

attitude that it wanted the then new RMD rules to be taxpayer friendly. One such rule was, a

qualified trust was authorized to use the life distribution rule. The basic rule was, the oldest

beneficiary of the trust was to be used to determine the RMD distribution period. So, again

note, the authority that a qualified trust is to receive special tax status versus another non-

person beneficiary is an IRS regulation. The special treatment or rules is not set forth in the

Tax Code.

The SECURE Act could have been expressly written to revise the definition of a designated

beneficiary to include a qualified trust. This was not done. One wonders why? My point, there

is some doubt whether a qualified trust is entitled to use the 10-year rule. If not, the trust is

subject to the 5-year rule. An inherited IRA will become subject to the annual 50% excise tax

applying to an excess accumulation if an inherited is not closed as required under the 5-year

rule. So, after the SECURE Act, there are two current questions? Question #1. Did Congress

intend to continue to allow a qualified trust to be treated as a person for purposes of the RMD

rules? The legislative history is minimal on this subject.

68


Is a Qualified Trust Beneficiary Able to Use the 10-Year Rule or Must it Use the 5-Year Rule? Question #2. Will the IRS continue to apply its special rule for a qualified trust after the

enactment of the SECURE Act? Trust professionals and trust beneficiaries for obvious

reasons certainly hope so. A distribution period of 10 years versus 5 years will have

very significant economic and tax consequences.

The IRS will be rewriting its RMD regulation. It is a question of when. It might be 1-4

years. Most likely the IRS will again write its RMD regulation so that special treatment is

given to a qualified trust versus other nonperson beneficiaries. But I believe there is

some chance that due to governmental needs for additional revenues that the IRS

would decide no longer to grant special treatment to a qualified trust as the SECURE

Act does not expressly authorize it.

The sooner the IRS issues guidance on this trust subject the better. I expect the IRS

will again write its RMD regulation to give special treatment to a qualified trust. I do

believe the influence of the trust industry with the IRS is very strong. Until the IRS

issues such guidance a person may wish to change or consider changing their IRA

beneficiary designation to a person or persons

rather than a trust.

69


If the IRA accountholder died before his or her RBD, then the life-distribution rule will be

used unless:

The trust would elect to use the five-year rule. The oldest beneficiary of the trust will

normally be the measuring life. The separate account rules do not apply to the

beneficiaries of a trust with respect to the trust’s interest in the accountholder’s benefit.

For each calendar year after the IRA accountholder’s death, the applicable distribution

period is initially determined from the Single Life Table by using the oldest beneficiary’s

age in the year after the accountholder’s death and then for subsequent years,

adjusting such factor by reducing by one for each calendar year that elapses after the

accountholder dies. This distribution period will continue and will not be modified by the

death of the beneficiary who is the measuring life.

Note: The trust is not restricted to a lump sum distribution.

70

Consequence if the trust is not a qualified trust

If death occurs before RBD, then 5 Year rule is mandatory.

If death occurs on or after RMD, then special life distribution rule is used

Trust is non-qualified

If there is a joint revocable trust and the first spouse dies.

If the trust has any non-living beneficiaries such as a church or university designated as

a beneficiary.

71

72

IRA Owner died on or after January 1, 2020 and the beneficiary is not and EDB and is not a person

The 5-year Rule applies

A Person’s Estate Should Not be Designated as the IRA Beneficiary

Q-1. The customer that contacted us is not married and is 73. He is converting funds

from Traditional IRA to a new Roth IRA and requested that his will dictate who is the

beneficiary of his Roth IRA Funds. If he doesn’t name a beneficiary, by default the funds

would go to the estate?

Is it correct that a will cannot be named as the beneficiary? He stated he wanted his

siblings to have equal portions as directed by his will. I’ve told him to contact his

financial advisor obviously, but staff here also had some questions regarding this topic

due to the caveats of not naming a beneficiary.

A-1. I will discuss, but he must act on the advice of his adviser. I am not that person. A

will/estate and a Roth IRA are two separate legal entities. For the income tax reason

discussed below, he does not want to name his estate as the beneficiary of his Roth

IRA. He should name his siblings directly as the primary beneficiaries of his Roth IRA

and not his estate. Why? Under the new beneficiary RMD laws when an estate is the

beneficiary, the Roth IRA must be closed under the 5-year rule. The 5-year rule does

not apply if he names one or more persons to be his Roth IRA beneficiaries. Before I re-

read your email, I had assumed that children would be the designated beneficiaries.

This was wrong of me. However, I am able to illustrate the tax benefits if the designated

beneficiaries would have been children. See the discussion in the next three

paragraphs. The main purpose of a Roth IRA is to have it earn tax-free income. Once

he has met the 5-year rule all income earned by his Roth IRA will be tax-free. This

includes while he is alive and then after his death. Upon his death, if a child had been

the designated beneficiary, then the Roth IRA would have been closed under the 10-

year rule.

73

A Person’s Estate Should Not be Designated as the IRA Beneficiary

Upon his death, if his estate had been the designated beneficiary, then the Roth IRA

would have been closed under the 5-year rule. Why miss out on 5 years of additional

tax free income? The discussion becomes a little more complicated if he designates his

siblings as his primary beneficiaries.

The fact is, the distribution period in many situations will be longer than 10 years. If so,

the tax benefits most likely will improve substantially. You have not indicated the ages

of any of his siblings. Some older? Some younger? Under the new laws a beneficiary

who is not more than 10 years younger that the Roth IRA owner is able to use the life

distribution rule and not the 10-year rule. See the single life table.

For discussion purposes I will assume he has a sister who is 5 years younger then him.

He dies when he is age 83. She would be age 78. The divisor from the single life table

is 14.8 years. This means she could have tax-free income for another 14.8 years rather

than the 10 years. If he names his estate as his beneficiary, the 5- year rule would

apply. Again, why miss out on an additional 14.8 years of tax free income?

I hope he and his adviser agree with me.

74

Overview

Special rules apply to an inherited IRA. First, an inherited IRA must make required

distributions to the beneficiary(ies). Second, there can be no additional contributions

made. If such distributions are not made by the appropriate deadline, a beneficiary is

liable to pay a 50% excise tax of the amount required to be withdrawn.

Types of Inherited IRAs

• Traditional

• SEP-IRA

• SIMPLE-IRA

• Roth

Traditional IRAs will be discussed first. All of the distribution rules applying to a

traditional IRA, also apply to a SEP-IRA and SIMPLE-IRA. Roth IRAs will be discussed

second.

General Discussion. Administering an inherited IRA

for a Non-spouse Beneficiary

75

76

Contributions

Custodial or Trust Account Earnings within Account are

not Taxed

Distributions

Beneficiaries

Original

Subsequent

In general, the beneficiary will include

the distribution in income and pay tax

but will not owe the 10% tax.

76 76

Inherited IRAs for Non-Spouse

1. No Annual or Rollover Contribution 2. Transfer-in from decedent’s IRA 3. Transfer from inherited IRA to Another Inherited IRA 4. Direct Rollover in from deceased 401(k) participant


CWF # 56I CWF # 56RI

77

Decedent’s IRA Inherited IRA for a

Non-Spouse Beneficiary

78

Non-Reportable transfer. Any distribution will be a reason code 4 if a

traditional IRA and a Q or T if a Roth IRA. Non-Reportable transfer. Any distribution will be a reason code

4 if a traditional IRA and a

Q or T if a Roth IRA.


Direct Rollovers – Yes

Rollovers – No

Transfers – No

Inherited QRP

Inherited QRP

Inherited

Roth QRP

Inherited Traditional

IRA

Inherited Roth IRA

Inherited Roth IRA

Direct Rollover Non-Spouse Beneficiary

(Direct) Rollover/Conversion Non-Spouse Beneficiary

(Direct) Rollover

Eligible Retirement Plan to Roth IRA Conversion. Since 2008 other retirement accounts can be converted directly to a Roth IRA.

This includes inheriting beneficiary of ERP.


79

Special Administration

1. Special titling for Form 5498 purposes.

As a result of the above special rules, an IRA beneficiary must be able to

identify the source of each IRA he or she “inherited” for purposes of figuring the

taxation of a distribution from an IRA.

For example, “Jane Doe as beneficiary of John Doe’s traditional IRA.

2. No rollover rights

3. No Additional Contributions

4. Special Transfer considerations

5. Special RMD requirements

80

*


Special Administration

Background: An inherited IRA (or beneficiary IRA) must be administered differently

than the IRAs for living accountholders. There are numerous reasons. First, a

beneficiary IRA is not allowed to accept additional contributions, and a non-spouse

beneficiary is not eligible to roll over a distribution from a beneficiary IRA. Second, the

required distribution rules always apply to an inherited IRA. Third, the beneficiary steps

into the deceased taxpayer’s shoes and assumes the tax rights which the deceased

accountholder had in the IRA. With one exception, the IRA distribution will be included

in the income of the beneficiary (and not the deceased accountholder), if applicable,

and the beneficiary will have to pay the taxes on such distribution at his or her marginal

tax rate, if applicable.

As a result of the above special rules, an IRA beneficiary must be able to identify the

source of each IRA he or she “inherited” for purposes of figuring the taxation of a

distribution from an IRA.

For example, “Jane Doe as beneficiary of John Doe’s traditional IRA.”

81


Non-Spouse Beneficiary Cannot Elect to treat the Decedent’s IRA as own

or roll over a distribution from an inherited IRA to another inherited IRA

or a regular IRA

A non-spouse beneficiary must be very sure that he or she wishes to be paid funds from

an inherited IRA, because a rollover is never permissible, including a rollover back into

the financial institution which just issued a distribution check.

Possible lawsuit if your bank makes a distribution which was not requested.

82


IRS Procedures

Form 5498 (box 11) - Not Required – And Not to be Checked

RMD Notices - Not Required, but CWF recommends

RMD Calculations - Not Required, but CWF recommends

Inherited IRA Plan Agreement - 2 Approaches

Tax Court in Bobrow vs. IRS

Commissioner

“Taxpayers rely on IRS

Guidance at their own peril.”

83


Determine Which “Death Situation Applies

1. Did the IRA Accountholder die before or after RBD ?

2. Who or what is the beneficiary ?

84


Establishing the Inherited IRA for a Beneficiary

Data Processing / IRS Reporting Duties/IRS Withholding Duties

• Form 5498

• RMD Notices

• Form 1099-R

• FMV Statements

85


Special Administrative Topics

What Special Reporting Duties Apply ?

• Final Form 5498 and FMV Statement must be prepared for the

deceased IRA Accountholder on a per plan agreement basis

• Form 5498 and FMV Statement may need to be prepared for

each inheriting beneficiary on a per plan agreement basis

A final FMV Statement and Form 5498 must be prepared using the IRA

accountholder’s name and social security number. The IRS has given the IRA

custodian/trustee two options. It may either report the fair market value as of the date

of death, or it may report a ‘0’ and instruct the executor that he or she may request

the value as of the date of death.

A final FMV statement and Form 5498 must be prepared for each inheriting

beneficiary showing the fair market value of his or her share as of December 31. If

the value is ‘0’ because the beneficiary withdrew his or her entire share, then a Form

5498 does not need to be prepared. Report using a beneficiary’s name and social

security number.

86



Special Form 1099-R Reporting for inherited traditional IRAs

• Form 1099-R Reporting – Rule 1 Transfer of funds from decedent’s IRA to the inherited IRA of a non-spouse

beneficiary is a non-reportable transfer.

• Form 1099-R Reporting – Rule 2 Every distribution made from an inheriting traditional IRA to an inheriting

beneficiary must be reported on a Form 1099-R and coded “4” for death.

87



IRA Software for Inherited IRAs – Approach # 1

IRA Software generally handles the subject of an inherited IRA in one of two ways.

Under the first approach, the ‘system’ is instructed that the IRA accountholder has

died. Various subaccounts are automatically set up for the inheriting beneficiary or

beneficiaries and the proper amount of money is transferred into each such

subaccount. The system will generate the proper information returns for the decedent

and the beneficiary(ies).

88



IRA Software for Inherited IRAs – Approach # 2

Under the second approach, the software is not written as comprehensively. In order

to generate governmental reports to each beneficiary, a separate account is et up for

each beneficiary on the computer system independent of the account for the original

IRA accountholder. The funds are then transferred from the deceased IRA

accountholder’s account to the ‘inherited IRA’ of the beneficiary. Such transfers are

non-reportable for Form 1099-R and Form 5498 reporting purposes. The account

title. “John Doe as beneficiary of Jane Doe’s IRA” should be used. Because so many

computer systems use the second approach.

CWF has written its contribution and distribution forms to show that funds may be

transferred from a decedent’s IRA and transferred into the beneficiary’s inherited IRA.

89



For Distribution to a traditional IRA Beneficiary – Use Code “4”

According to the number of consulting calls we receive on the subject, there seems to

be confusion as to when to use code “4” (Death Distribution) in box 7 or the Form

1099-R. For any distribution to an inheriting traditional IRA beneficiary, Code “4” is to

be used. It does not matter how many years have passed since the accountholder’s

death: Code “4” is to be used.

90

Note: Code “4” is not used to inform the

IRS that an IRA accountholder has died.



Document the Distribution

CWF57 91


RMD Notice For

Non-Spouse

Beneficiaries for

Life Distribution Rule

92 CWF62-7


RMD Notice For

Non-Spouse

Beneficiaries for

2021 5 Year Rule

CWF62-8 93


Missed RMDs

50% Tax is owed unless the IRS would waive

Form 5329 – completed and filed by the beneficiary

94

Special rule - In some cases, the beneficiary may elect to use the 5-year rule rather

than the life distribution rule. Example, IRA owner dies in 2019. Beneficiary failed to

take RMD distribution for 2019 and 2020 This beneficiary may elect to use 5-year

rule rather than the life distribution rule. If so, the 50% tax is not owed for 2019 and

2020. Once the beneficiary switches from the life distribution rule to the 5-year, he or

she may not switch again.


Special

Administrative

Topics

Alternative Method

Applies to Like-Kind

Inherited IRAs

• Multiple Like-Kind

Inherited IRAs

• Be sure to Document

CWF # 312

To be Like-Kind the inherited IRA must

arise from the same decedent and be the

same type of IRA

95

Inherited IRAs which arise from the same

original IRA accountholder are considered to

be like-kind IRAs and may be aggregated for

purposes of satisfying the RMD requirement.

However, you may not aggregate an

Inherited IRA from one person with your own

personal IRAs, or with an IRA inherited from

a different person.

96


RMD Alternative Method – Multiple Like-Kind Inherited Traditional IRAs

Inherited IRAs from the Same Person

IRA # 1 IRA # 2 IRA # 3 IRA # 4

RMD $1,000 $1,200 $1,300 $1,400

Could take $4,900 from any one inherited IRA or any combination of IRAs

97


98

The Withdrawal Rules

When may the IRA beneficiary start to withdraw money or assets

from his or her inherited traditional IRA ?

The IRA beneficiary may begin withdrawals at any time.

Unless the IRA owner imposed a restriction He or she will

want to understand the income tax consequences.

98

99

Distributions

Why are distributions reportable in the Form 1099-R ?

Encourages individuals to report such distributions on the federal

income tax returns.

Informs the IRS of the distributions and allows the IRS to see if the

individual is properly reflecting the distribution on his/her tax return

and paying the proper amount of income tax.

99

100

What are the tax consequences of an IRA distribution ?

If the original IRA owner had not made any non-deductible contributions, then the

distributions will be taxable as ordinary income. However, if the person has made both

deductible and nondeductible contributions, the beneficiary will not generally have to pay

income tax pro rata on the part of the distribution representing the nondeductible

contributions. The 10% tax does not apply to an distribution to a beneficiary even when

the beneficiary withdraws more than the RMD.

100

CWF’s IRA

Distribution Form

CWF #57

Source of Information

Distribution Reason

Amount

Withholding

101

CWF’s IRA

Distribution Form

CWF #57

102

Withholding

Federal Withholding Procedures - Notice & Instructions

Election Procedure and documentation

10% Federal withholding is required on every traditional IRA

distribution unless an election is properly completed

Documentation is required, IRS W-4P or valid substitute

Documentation is required, IRS W-4P or

valid substitute CWF # 57

103

QP withholding rules are not the

same as IRA withholding rules.

Withholding

Federal Withholding Procedures

State Withholding Rules

Penalty on the IRA custodian/trustee for non-compliance is the amount of

withholding that should have been withheld and was not.

Penalty on the IRA custodian/trustee for non-compliance could be the

amount of taxes owed by the IRA accountholder.

104

Withholding

Federal Withholding Procedures Notice Requirements

Non-Periodic Distributions

Periodic Distributions Proper notice must be given prior to every distribution only once-per-year if receiving

4 or more scheduled distributions If mailed, notice must be received within 6 months and a reasonable amount of time before the

distribution

Penalty on the IRA custodian/trustee for non-compliance is $10 for each failure

105

Withholding

Federal Withholding Procedures

Deposit Requirement

Monthly, semi-weekly, or annually

Check or Electronic Funds

Transfer

106

Withholding

Federal Withholding

Procedures

Annually, IRS Form 945 is

due by January 31 for the

previous year

IRS Form 945

2016

107

108 108

IRS Form 1099-R

Unique Account Number Requirement

Account Number

The account number is required if you have multiple accounts for a recipient

for whom you are filing more than one Form 1099-R. Additionally, the IRS

encourages you to designate an account number for all Forms 1099-R that

you file. See part L in the General Instructions for Certain Information

Returns

IRS Recommendation – Should not be variations of SSN

109

Distributions

Standard way to complete the Form 1099-R for Traditional IRA

General Rule: Box 1 and Box 2a are completed with the same amount then

box 2b is checked

110


Transferring an Inherited IRA - Special Procedures

If you are the receiving institution, the successor custodian/trustee, you will probably

want to get a copy of the IRA plan agreement and beneficiary designation of the

deceased accountholder. In addition we recommend that you have the beneficiary sign

an IRA plan agreement. CWF now has an inherited IRA Plan Agreement for this

purpose. Per the IRS, the account must be titled in this manner:

“ABC Financial Institution as custodian/trustee for John Jones as

beneficiary of James Smith’s IRA.”

The transferring custodian/trustee should be certain that the inherited funds will be

properly administered by the successor custodian/trustee and that all required minimum

distribution rules will be complied with.

The CWF Form #56-Inherited was designed for this purpose. This form, or some other

appropriate form, should obtain the beneficiary’s signature as well as the signature of

the representative for the successor custodian/trustee stating that the proper

regulations will be followed.

111


112 CWF56I

113 CWF56RI

Special Administration Topic Qualified Charitable Distribution – Finally Settled 12/18/2015

Now Permanent

IRA Beneficiary must be 70½ or older – did not change to age 72

• Distribution must be from Inherited Traditional IRA or Roth IRA

• Cannot be from an active Inherited SEP or an Inherited SIMPLE IRA

• Counts toward RMD

• Even Past due RMDs

• Distributions must be to eligible charity

• Distributions must be made directly to the charitable organization

• Individual can deliver/mail personally

• Special tax calculation rules

• Inherited Traditional IRA not Prorated

• Inherited Roth IRA Not in distribution “Order” 114


RMD Distribution

Qualified Charitable Distribution

Recommended administration

IRA Beneficiary responsibility

Document distribution

No Special custodian/trustee reporting

IRA Beneficiary is allowed to deliver check

Maximum of $100,000 per year/per person

IRA Custodian/Trustee reports as usual

IRA Beneficiary reports on Form 1040

Line 15a and 15b

“QCD” in margin

115


Inherited IRAs for

Non-Spouse Beneficiaries

CWF Form # 57-C

Certification for Tax-Free

Distribution from

Traditional/Roth IRA

CWF57C 116

30000.00

30000.00

X

X 4

Traditional IRA Beneficiary over 70½

IRA Beneficiary responsibility – qualifying charity

Document distribution

No Special custodian/trustee reporting

$100,000 limit check made payable to the charity

IRA Beneficiary is allowed to deliver check/draft

IRA Custodian/Trustee reports as usual

Qualified Charitable Distribution

Recommended Administration:

117

0 QCD


30,000

118


Moving Inherited IRA Funds to an HSA

Pursuant to Notice 2008-51 (June 2008), a inherited traditional IRA or Roth IRA

beneficiary has the right to make a tax-free transfer of his or her inherited IRA interest to

his or her own HSA. It is certainly not clear that the Congress intended to allow a

beneficiary to make a tax-free transfer from a decedent’s IRA to his or her own HSA, but

the IRS has authorized such a transfer in this Notice.

And it gets better. When a beneficiary transfers funds from his or her inherited IRA to an

HSA, such a transfer will count to satisfy his or her IRA required distribution from the

inherited IRA.

119


120

Example – Jane has a inherited traditional IRA with a balance of

$30,000. She is HSA eligible for 2021 She is age 58. She has a family

HDHP. No contributions have yet been made to her HSA for 2019. She

instructs she wished to do a QFD of $8,200.

Inherited IRA HSA

$30,000 $8,200

Used to pay qualified medical expense = tax-free

Transfers from IRAs and Inherited IRAs Inherited IRA HSA


121

Transfers from IRAs and Inherited IRAs

• Qualified HSA Funding Distribution

• Must be an Eligible HSA Contribution

• Must be a trustee-to-trustee transfer (direct rollovers)

• One per Lifetime

• Testing Period

• Reported as HSA Contribution on 5498-SA

• Reported as an IRA Distribution on 1099-R.

• Individual explains on tax return that it is not taxable

• Cannot be made from an ongoing SEP-IRA or SIMPLE IRA.

Inherited IRA HSA

Inherited IRA HSA


122

Transfers from IRAs and Inherited IRAs

• Must be an Eligible HSA Contribution

• Must be a trustee-to-trustee transfer (direct rollover)

• Reported as HSA Contribution on 5498-SA

• Reported as a Distribution on 1099-R. Special tax explanations.

• One per Lifetime

• Exception – Changing from Single HDHP to Family HDHP

• Must be accomplished in same calendar year, for same tax year by Dec 31

• Cannot be done between January 1 and April 15 for prior tax year

Inherited IRA HSA


CWF HSA # 66

Certification for

One Per Lifetime

Transfer of IRA Funds

To an HSA

Inherited Traditional IRAs for


CWF66 123

124

New Type of Inherited IRAs – Direct Rollover from a 401(k) Plan

The law was changed as of January 1, 2007, to allow a non-spouse beneficiary of a

pension plan participant to directly roll over the inherited funds into a new type of

inherited IRA. The individual/beneficiary is the required to take required distributions

from the inherited IRA. This form is used by the individual/beneficiary to instruct how and

when distributions will be taken and what method will be used. Normally an

individual/beneficiary would directly roll over standard pension funds into an inherited

traditional IRA.

Inherited IRA Accountholder’s Distribution Instruction and Certification to Comply with

RMD rules, CWF IRA # 205

125

Daughters Inherited IRA Dad’s

401(k)

Mom’s Inherited IRA Daughter’s

401(k)


Direct Rollovers of Inherited Funds

126

Inherited QRP Inherited Traditional IRA Direct Rollover


Inherited QRP

Inherited Roth QRP

Inherited Roth IRA

Inherited Roth IRA

(Direct) Rollover/Conversion


Direct Rollover


CWF # 205

Inherited IRA Accountholders

Distribution Instruction And

Certification to Comply With

RMD Rules

CWF205 127

Special Administrative

Beneficiary Disclaimers – A Beneficiary Can Decline a Gift

• Get a copy of the written disclaimer for the file.

• Get a signed indemnification agreement. This is the most conservative route, but

this hold harmless agreement states that the disclaimer takes responsibility for

any unforeseen tax consequences.

• Determine the proper beneficiary(ies). Under the laws of most states, a

“disclaimed” beneficiary is treated as if he or she predeceased the

accountholder. It would be best if the IRA Custodian’s attorney would make

the determination of who are the primary beneficiaries “after” the disclaimer

128


129


Traditional and Roth IRA Beneficiary

Qualified Disclaimer

• Internal Revenue Code section 2518

• Must be irrevocable and unqualified

• Must be in writing

• Must be done within the later of 9 months after the date of death, or age 21

(Can be a problem for IRAs)

• Cannot direct who is to get his/her share

• Can disclaim just part of the IRA

• Recommend using an attorney to cover any applicable state statutes

130

Remember, until the qualified disclaimer is executed, the

beneficiary of record is subject to all the usual requirements for

RMDs. This includes the custodian/trustee reporting.



What to Do Once the First Inherited IRA Beneficiary Dies

Set up an inherited IRA for the successor beneficiary

The first inheriting beneficiary, presumably, will have designated his or her own

beneficiary(ies). The successor beneficiary will have inherited the inherited IRA. The

RMD formula which applied to the first inheriting IRA beneficiary will apply to any

successor beneficiary. Again, unless there has been some restriction imposed, the

successor inheriting beneficiary is able to withdraw more than the required minimum.

A successor inheriting beneficiary will wish to designate his or her own beneficiary(ies)

and instruct how and when distributions will be taken.

CWF has created a special form for a successor inheriting beneficiary to instruct how

and when distributions will be taken. It is Form 204-A, Successor Beneficiary’s

Distribution Notice and Certification Form and Payment Instruction, as set forth at the

end of this presentation.

Titling of Form 5498 after the death of the first beneficiary.

131


Determining the Period/LE Factor for the Second Inherited Beneficiary

132

Example: The IRA Accountholder (John Doe) dies on 9-15-2018 at the age of 65,

before his RBD. Jane Doe is the only primary beneficiary. She is age 40 in 2018 and

will be age 41 in 2019. Jane dies in 2023. Her beneficiary is her daughter, Mary. The

initial factor comes from the single life table and then subsequent factors are

determined by subtracting 1.0 for each following year. However, because of SECURE

Act, when Jane dies her beneficiary must close the IRA under the 10-year rule.

Beneficiary Factor

Year of Death 2018 40 N/A

1 2019 41 44.8

2 2020 43.8

3 2021 42.8

4 2022 41.8

5 2023 40.8

6-15 2024-2039 10-Year Rule

Jane Dies


CWF # 204A

Successor Beneficiary’s

Distribution Notice

And Certification Form

And Payment Instruction

Inherited Traditional

IRAs for


CWF204A 133

Quiz / Inheriting / Beneficiary IRA Consulting Call of February 3, 2022

Inheriting/Beneficiary IRA Consulting Call of February 3, 2022.

Alice’s mother, Corrine Davis, had her traditional IRA with IRA Custodian #1 for over 25

years. Corrine had died on July 23, 2021 at the age of 83 with a balance of $100,000.

Her RMD for 2021 had been calculated to be $6,200. She had not been paid any

amount prior to her death. Alice and her three siblings were the primary beneficiaries of

Corrine’s IRA. Alice and her sister, Mattie were paid $25,000 in September of 2021. The

other two beneficiaries were Alice’s brothers, James and Mark. They were paid no

amount in 2021.

134


Quiz / Inheriting / Beneficiary IRA Consulting Call of February 3, 2021

Alice Davis, age 47, has just called IRA Custodian # 1 and talks with Dana. Dana

handles many tasks in addition to IRA tasks.

Alice has called and asked, “Wasn’t I supposed to be sent a 2021 Form 1099-R showing

a distribution of $25,000, the amount I received with respect to my mother’s IRA ?”

135


Copyright 2021 © Collin W. Fritz & Associates, Ltd. “The Pension Specialists” All rights reserved. No part of this presentation may be reproduced in any form and by any means

without prior written permission from Collin W. Fritz & Associates, Ltd.

Documents

Inherited Traditional IRAs