IRA Custodial Rules - Kind of Like Beer Pong, In a Way
You know the game “beer pong?” Arrange 6 or 10 cups in a triangle, fill each one with a couple of ounces whatever beverage you are enjoying, and your opponent tries to toss a ping-pong ball into one of the cups. If a throw is successful, the contents of that cup are consumed, and it is removed from the table. Rinse the ball off, and it’s your turn to try and toss it into one of the other person’s cups. The first person to eliminate each of his opponent’s cups wins.
What’s interesting is the number of permutations and in-house rules that can apply. Some people forbid bouncing the ping-pong ball. Others say a bounced ball into a cup means the thrower gets to choose a second cup to be consumed and removed from the table. On and on the different rules go.
Such is the case with IRA custodians. There are different in-house rules for different scenarios. For example, titling of an inherited IRA can be handled in multiple ways. The deceased IRA owner’s name must remain on the inherited IRA account and the account title must indicate that it is an inherited IRA by using the words “beneficiary” or “inherited IRA.” However, there is no set format or hard-and-fast rules dictating EXACTLY how an inherited IRA is to be titled. As long as the deceased IRA owner’s name remains on the account and it’s clear that it is an inherited IRA, then all is well. A properly titled inherited IRA could look something like: “John Smith IRA (deceased 11/27/22) F/B/O John Smith, Jr., Beneficiary”
Another example of custodians handling things differently is when it comes to their policies allowing spousal rollovers even though a trust is named as IRA beneficiary. If a trust is named, then we would expect to see an inherited IRA for the trust established. After all, the rules are clear. If a trust is named as the beneficiary, the inherited IRA should be set up for the trust. However, if the surviving spouse is the sole beneficiary of the trust, and if that person has total control of the trust assets, in many private letter rulings (PLRs), we have seen the IRS allow the surviving spouse to do a spousal rollover of the assets into her own IRA. But this is not automatically allowed. It is the custodian’s decision to allow the spousal rollover or not. If the custodian refuses, it may be necessary to get your own PLR from the IRS.
Similarly, an “estate bypass” is something a custodian may or may not allow, based on their in-house rules. When an estate becomes an IRA beneficiary, we would typically see an inherited IRA set up for the estate. But depending on the applicable payout structure, this could force the estate to remain open for many years. To be able to close the estate, some custodians allow inherited IRAs to be established for the estate beneficiaries. The downside is, these accounts will still be bound by the payout rules applicable to the estate – like possibly the 5-year rule. Again, this is at the custodian’s discretion, so if they refuse, a PLR may be in order.
Not all IRA rules are fixed across the board. There is some flexibility among custodians. Hopefully we all find ourselves dealing with helpful and agreeable partners. But if you do run into a custodial brick wall, maybe a game of beer pong is in order. Just watch that elbow.
By Andy Ives, CFP®, AIF®
IRA Analyst
Ed Slott and Company, LLC
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.