Combining Inherited IRA’s & RMD’s
I have an interesting situation. My client’s father passed in 2008 with 2 seperate Traditional IRA’s, and each IRA has all children (my client & his 4 brother & sisters) equally as benificaries. The deceased was required to take RMD’s starting in 2007.
Deceased took RMD’s from one IRA in 2007 but not the other, and no RMD’s were taken yet in 2008 for either IRA. The RMD taken was enough to satisfy RMD requirements for the one IRA, not both.
We would like to move the $$ into inherited IRA’s for each of the 5 children the following way.
1 Doing a trustee to trustee transfer, transfer the $$ from the IRA with no 2007 rmd’s to seperately properly titled IRA’s for each of the kids, and then take the ’07 RMD’s, penalty, ect., and then take the 2008 rmd’s.
2 Then, move the second IRA into each of the kid’s properly titled IRA’s above, and take the 2008 distribution for the second IRA.
This would leave each child with a single inherited stretch IRA, and make the recordkeeping for them much simpler. Will this work (legally)?
Permalink Submitted by Alan Spross on Sat, 2008-04-12 02:48
It would be equitable and meet requirements, but presents alot of unnecessary transactions.
The delinquent RMD from the decedent can be calculated as a fixed dollar amount. The first step could be eliminated and the final separate accounts established for each beneficiary from both of the former IRA accounts, then 20% of the delinquent RMD immediately taken from each of the separate accounts. In other words, the two existing IRA accounts would be split 5 equal ways by direct transfer into 5 separate beneficiary titled accounts before taking the delinquent RMD.
Assuming the beneficiaries have now filed for 2007, they would each file a Form 5329 in the next couple months explaining the delayed RMD reasonable cause (“RC per Inst for 5329, p 6). The IRS would waive the excess accumulation penalty in this case.
They would then each be on their own to satisfy the 2008 RMD requirement based on their different life expectancies. Each would be taxed on the total of their 2008 distributions including the 20% share of the delinquent RMD.
Permalink Submitted by Joel Broersma on Wed, 2008-04-16 19:46
Are you sure you have to take the RMD’s for the deceased after the transfer, not before? Then we have the estate file the paperwork with the IRS concerning the missing RMD’s.
Then the 2009 rmd’s would be based on the beneficaries age, and on we go.
Permalink Submitted by Alan Spross on Wed, 2008-04-16 22:32
The RMDs can be taken either before or after the transfer because of the aggregation rules for IRA RMDs including those IRAs inherited from the same decedent. Following is pasted from the IRS Regs:
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Q–9. Is the required minimum distribution from one IRA of an owner permitted to be distributed from another IRA in order to satisfy section 401(a)(9)?
A–9. Yes, the required minimum distribution must be calculated separately for each IRA. The separately calculated amounts may then be totaled and the total distribution taken from any one or more of the individual’s IRAs under the rules set forth in this A–9. Generally, only amounts in IRAs that an individual holds as the IRA owner may be aggregated. However, amounts in IRAs that an individual holds as a beneficiary of the same decedent and which are being distributed under the life expectancy rule in section 401(a)(9)(B)(iii) or (iv) may be aggregated, but such amounts may not be aggregated with amounts held in IRAs that the individual holds as the IRA owner or as the beneficiary of another decedent. Distributions from section 403(b) contracts or accounts will not satisfy the distribution requirements from IRAs, nor will distributions from IRAs satisfy the distribution requirements from section 403(b) contracts or accounts. Distributions from Roth IRAs (defined in section 408A) will not satisfy the distribution requirements applicable to IRAs or section 403(b) accounts or contracts and distributions from IRAs or section 403(b) contracts or accounts will not satisfy the distribution requirements from Roth IRAs.
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However, I did miss the date of death of IRA owner and replied as if it was in 2007. To re state accordingly, the delinquent RMD from 2007 could be taken as stated, but for 2008, the RMD is also based on the decedent’s 12/31/07 balance and must be taken prior to 12/31/08 by the beneficiaries. As you stated, in 2009 they are on their own under separate accounts.
When you indicated the estate would file paperwork, I assume you mean that the executor would take care of this with a 5329 on the decedent’s 2007 return and also on the final 2008 return. There would be no mention of IRAs on any 1041 since the IRAs passed outside the probate estate to designated beneficiaries.
Of course, you could also proceed according to your original post and get to the same conclusion, but the aggregation rules would not require that many transfers. Also, there is no need to pay the 2007 accumulation penalty when the IRS has been routinely waiving these penalties when the error is rectified fairly quickly.
Permalink Submitted by Joel Broersma on Wed, 2008-04-23 17:37
Excellent! Thanks so much for your help – this will make it much easier for me to do and also to explain to the beneficiaries. Your help & guidance is MUCH appreciated!