Changing IRA Beneficiaries

My dad recently passed away (this is in Illinois) and left a Traditional IRA with three of his four children as beneficiaries. My family agreed that my brother, who was left out, should have been listed as a beneficiary and is entitled to an equal portion of the IRA.

After talking to Schwab, they were very insistent that we need a court order to change the beneficiaries. But seeing as an IRA isn't part of my dad's estate, I'm not sure why a court order would be necessary.

Is there any action my family can pursue to change this without having to cash out the IRA? I can't imagine we are the first family to request a beneficiary change.

Thanks!

How much is involved? Why not cash out the IRA? Another option is to roll over the IRA into individual IRA's for the beneficiaries.

Schwab needs some legal authority to change the beneficiaries. They don't have it as it now stands. Do what they say, and get it done. Not that big of a problem.

That IRA is a contract when beneficiaries specified, and isn't part of the 'estate'. If you are going to have the individuals 'cash out' the IRA, then you can pay the income tax due (the distribution is income) and you all can each give the other brother a piece of the remaining dollars.

Depending on the value of the IRA, however, if you cash out you would be passing up the ability for the named three..... to each assume an inherited IRA. An IRA has defferred tax advantages to you. Read up on inheriting IRA's.

Couple things to keep in mind.
- With a traditional IRA, you have to watch required minimum distributions. If your dad was over 70.5 and started taking them, then you need to continue, but over a different age lifespan, read up on the rules. If your dad didn't yet have to take distributions, watch for when you do with the lifespan that gets assigned to the inherited IRA, read up on the rules. Severe penalties if you don't take the distributions timely, the IRS wants it's tax money!
- You can consider converting the inherited 'traditional' IRA to a Roth IRA, if you are under the AGI threshold. That threshold gets temporarily eliminated in 2010, which gives you an upcoming conversion window you can act, if you can't act now. Read those rules that were passed for 2010. With a Roth IRA, after you pay the taxes, it then grows totally tax free, and no required minimum distributions.

We just recently talked with the company that holds our 401K's and IRA's, and walked thru the conversion process with my wife as apart of an estate planning exercise if one of us dies. We wanted to be very specific that we knew how the asset passed to primary beneficiaries, and then to the secondary beneficiaries would be allowed if my wife elected not to take the IRA (herself as the primary). They had a specific group of people who handle all of the death conversions, so you may want to make sure you were talking with the rights 'experts' at Schwab.

- You can consider converting the inherited 'traditional' IRA to a Roth IRA, if you are under the AGI threshold. That threshold gets temporarily eliminated in 2010, which gives you an upcoming conversion window you can act, if you can't act now. Read those rules that were passed for 2010. With a Roth IRA, after you pay the taxes, it then grows totally tax free, and no required minimum distributions.

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Unless there have been some recent clarifications that I missed, a non-spouse beneficiary cannot convert an inherited IRA to a Roth.

A spouse can elect to treat the inherited IRA as their own and convert. Employer plan beneficiaries can now convert.

Go figure.

curb1 said:

How much is involved? Why not cash out the IRA? Another option is to roll over the IRA into individual IRA's for the beneficiaries.

Schwab needs some legal authority to change the beneficiaries. They don't have it as it now stands. Do what they say, and get it done. Not that big of a problem.

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Cashing out is an option, but I'd like to reserve it as a last resort; the IRA is worth a substantial amount.

I'll try calling them again to see what they need specifically. The problem is that they've been very vague about what they need and giving me a bit of a run around.

DJones,
I have worked with the people at Schwab for many years. Generally, they have been quite good. You might have to make a few calls to get the information you need, but be very specific in your questions.

After following the directions from Charles Schwab, you might look at this website:

Inherited IRA | IRA Distributions | Strecth IRA | IRA Rules