IRA BDA Timeframe to establish
Grandmother passed away at age 68 four years ago. Six minor grandchildren were named as equal beneficiaries to her IRA. The parents of the six minor grandchildren are now finally getting around to dealing with the paperwork. The parents have paperwork to establish IRA BDAs for each minor child from the custodian that continues to hold Grandma’s IRA.
1) Is there a time limit by which IRA BDAs have to be established?
2) If IRA BDAs can still be established and funded with proceeds from Grandma’s IRA, shouldn’t the grandkids immediately take MRDs for the last four years to catch up and pay any penalty taxes?
3) What is the penalty tax rate for missed MRDs? 50%?
4) I realize they could simply cash out the IRA and pay taxes on the entire amount because we still are within 5 years of date of death …. but this IRA is quite large so the IRA BDA approach would be preferable from a tax standpoint, even if excise taxes on missed MRDs are owed.
5) Any other thoughts?
Thank you!
Permalink Submitted by Alan Spross on Thu, 2009-07-30 17:58
1) No time limit to establish separate accounts or BDAs, but there is a definite cost of delay. In this case, since the separate accounts were not established prior to the end of the year following Grandmother’s passing, the age of the oldest designated beneficiary must be used by all of them. If they are all relatively close in age, this damage should be limited. There is also potential fallout from failing to name successor beneficiaries in the event anything happens to any of the designated beneficiaries.
2) Yes, the stretch can still be saved as long as life expectancy is the default rule in the IRA agreement for deaths prior to the RBD (PLR 2008 11028). While the letter ruling included payment of the excess accumulation tax, there is no downside to requesting that the excise tax be excused for reasonable cause, eg if legal guardian appt or other circumstance resulted in the delay initiating RMDs. Also, note that the 2009 RMD has been waived.
3) Yes, 50%. And the IRS may charge interest on late payment of this tax.
4) Agree, much better to preserve the stretch as RMDs are so small at young ages the BDA could continue to grow for decades. It is also possible that Roth conversions could be allowed in the future from the non spouse BDA, although that is not the case at present. Once distributed, these benefits are erased.
5) If the IRA agreement is one of the few that still has the 5 year rule as the default option, the PLR would not apply, and they would be locked into the 5 year rule. Unlikely, but this should be checked out.
Permalink Submitted by tomd37 on Thu, 2009-07-30 18:24
Sorry, but I do not recognize the abbreviation BDA. Can someone please define. Thanks.
Permalink Submitted by Alan Spross on Thu, 2009-07-30 18:42
Beneficiary Designation Account.
This is an informal phrase to describe an inherited IRA that has been properly re registered in beneficiary format. Some institutions use this term and others do not.
Permalink Submitted by chris erickson on Thu, 2009-07-30 19:07
Thank you very much for the reply Alan.
Permalink Submitted by tomd37 on Thu, 2009-07-30 19:45
Thanks Alan. So that term applies to the Roth IRA that my daughter inherited as a result of our son’s death at the end of last year. I just did not recognize the abbreviation. I always continue to learn things on these forums and that is a good situation. Never too old to learn.
Permalink Submitted by Alan Spross on Thu, 2009-07-30 20:37
Right. It applies to either an inherited traditional IRA or inherited Roth. It would even apply to a spouse if the IRA was kept in inherited registration form and ownership had not been assumed by the surviving spouse.