IRA distributions
A son inherits his Mother’s IRA in 2003. IRA is titled inherited.
His mother was only 62 when passed away and had not started taking distributions.
Account has been left alone since then.
Can one go back and do the yearly calculations using the life expectancy of the son for each respective year and each respective 12/31 balance and take those distributions now and be current? Is there a 50% tax on what should have come out? What’s the ideal way to deal with this?
Permalink Submitted by mk foss on Tue, 2008-12-23 22:09
The IRS issued a ruling within the last year or so allowing someone in these circumstances to switch from the five-year rule to life expectancy by withdrawing the amount they should have taken each year. The person requesting the ruling asked the IRS to waive the penalty for not withdrawing the RMD on a life expectancy balance each year but the penalty was not waived.
Private rulings only apply to the person requesting them BUT if you wanted to follow this ruling you would do the following:
1. Calculate the RMD for each prior year 2004-2007.
2. File Form 5329 for each of those 4 years and send a check for 50% of each missed amount
3. Calculate the RMD for 2008 and withdraw it by 12/31/2008.
If you had just missed one year, I’d recommend that you withdraw the missed RMD and request that the penalty be waived. If you’re willing to pay 4 years of penalties, it may not be necessary to withdraw those missed RMDs.
Just my opinion. I hope someone else comments as well.
Permalink Submitted by Alan Spross on Tue, 2008-12-23 22:47
With all the current RMD exceptions, both passed and proposed out there, there are going to be many more 5329 requests. Based on current times, I do not think it would be overly aggressive to both take the back RMDs AND request a waiver of the excess accumulation penalties for each year. In PLR 2008 11028, the beneficiary only missed two RMDs and the IRS ruled that the default rule was still life expectancy, but they did NOT waive the two years of penalties. This does not mean that there is not a good chance to get them waived now. The following is copied from a 9/10/2008 article by Natalie Choate:
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But then you have to deal with the problem of the two years’ worth of missed distributions. As it stands right now, Suzanne owes a 50% penalty for each distribution that she did not take. There are only two ways she can get out of paying that penalty.
One way is to cash out the entire inherited IRA by Dec. 31, 2010; in other words, comply with the five-year rule and give up on the life expectancy payout. When there is only one Designated Beneficiary, and he/she withdraws all of the benefits by the end of the five-year-rule period, the IRS regulations provide that the penalty for any missed RMDs in earlier years is automatically waived..
The other way to get out of the penalty is to get an IRS waiver. The waiver is requested by filing form 5329. Suzanne would have to file two, one for each missed year. Along with the form reporting the missed distributions, she would explain to the IRS why her failure to take the distributions was due to “reasonable error” (if she didn’t know the accounts existed that should be reasonable error), and she would also have to take “reasonable steps to remedy the shortfall” by taking out the missed distributions now, in 2008, before requesting the waiver.
But there is no guarantee the IRS will grant the waiver. In PLR 2008-11028, the beneficiary “A” did have to pay the 50% penalty for the two years’ distributions she had missed, even though she had taken “catchup” distributions prior to requesting the ruling. We aren’t told why the penalty was not waived; perhaps the beneficiary forgot to request a waiver, or perhaps the IRS found her failure to take the distributions was not due to reasonable error.
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So, not much to lose by requesting the waiver and not fronting the penalties —— except additional interest charges if they do not agree. Use your best excuse for failing to take the RMDs. You might even say you thought the 5 year rule applied and just found out differently……
Permalink Submitted by Al Fry on Wed, 2008-12-24 16:00
Also, the account balance for each year used to calculate the RMD cannot be reduced by the missed RMDs, whether taken out later or not.