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We have a traditional IRA for a customer who recently died (after reaching the age of 70½). The IRA has five beneficiaries, who have requested that we make lump sum distributions for their shares of the account. Do they need to open new IRAs before we distribute their shares? – IBA Compliance Connection

IBA Compliance Connection

Your go to source for compliance!

We have a traditional IRA for a customer who recently died (after reaching the age of 70½). The IRA has five beneficiaries, who have requested that we make lump sum distributions for their shares of the account. Do they need to open new IRAs before we distribute their shares?

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We are not aware of an IRS requirement that IRA beneficiaries open new IRAs before taking lump sum distributions. Of course, the IRS rules may impose taxes on such distributions, but they do not prohibit an IRA trustee from making a lump sum distribution when requested by a beneficiary.

However, we understand that there may be operational reasons to first open a new IRA for beneficiaries before making distributions. In order to correctly report the distribution on IRS form 1099-R, the form must show the beneficiary’s social security number — not the original IRA owner’s social security number. To ensure that the correct social security number appears on the 1099-R form, it may be necessary close the original IRA and open new IRAs for the beneficiaries before distributing their shares.

For resources related to our guidance, please see:

  • IRS webpage, Retirement Topics — Required Minimum Distributions (RMDs) (“Your required minimum distribution is the minimum amount you must withdraw from your account each year. You can withdraw more than the minimum required amount. Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).”)
  • IRS, Instructions for Forms 1099-R and 5498 (“If you make a distribution to a beneficiary, trust, or estate, prepare Form 1099-R using the name and TIN of the beneficiary, trust, or estate, not that of the decedent. If there are multiple beneficiaries, report on each Form 1099-R only the amount paid to the beneficiary whose name appears on the Form 1099-R, and enter the percentage in box 9a, if applicable. . . .”)