How to Work With Non-spouse Beneficiaries


Non-spouse beneficiaries cannot do IRA rollovers as per IRC Section 408(d)(3)(C). Nor can they use the 60-day rollover rule. However, they can possibly move inherited IRAs by trustee-to-trustee transfers. But the IRA custodian might not allow such transfers. And the beneficiaries will have to accept a taxable check if they want to move their funds.

non-spouse beneficiaries

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Non-spouse Roth IRA beneficiaries must take required distributions. But generally they will be tax-free.

The cost basis of an IRA carries to all beneficiaries. If the contributions were tax deductible, all withdrawals are taxable to the beneficiaries. However, if the deceased owner had made nondeductible contributions, those contributions become the cost basis. Thus, there is no tax on those amounts. But most beneficiaries do not realize this, and end up paying more tax than necessary.

You will have to locate Form 8606, which shows the amount of nondeductible IRA contributions. This will be attached to the deceased’s past tax returns. But just because you can’t find any copies of Form 8606 does not mean there weren’t any nondeductible contributions made. Possibly, they just weren’t filed.

Check IRA statements. Or find Form 5498, which shows if IRA contributions were made. You can then refer to the tax return to see if a deduction was made. If it wasn’t, you can assume that the contribution was nondeductible.

Inherited Roth IRAs are much simpler since all the contributions were nondeductible and can be taken out tax-free. Furthermore, the earnings can also be distributed tax-free as long as the Roth was held for more than five years (including the time held by the original owner). However, if you fail to take required distributions from the inherited Roth IRAs, you get hit with a 50% penalty on the amount not taken.

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