Inherited IRA prior to RBD
Scenario:
2005
IRA Owner deceased prior to required beginning date
Son named as primary beneficiary
IRA retitled in same year as IRA owner’s death to Decedent (Inherited) IRA
Son takes distribution from inherited IRA
Son has indicated that he had (or is) electing to take the RMDs over a 5 year payout instead of the Single Life – 1 option
Questions:
[b]1. In 2005 was a person required to elect a payout option — 5 year or Single -1?[/b]
a. If yes, is the Son required in 2009 to take an RMD or would it be suspended by WRERA of 2008?
b. If no, I can assume that the Son is only required to take RMDs each year based on the Single -1 schedule, correct?
[b]2. When does the Single – 1 schedule begin in this case? [/b]
a. Year of IRA owner’s death, since the Son started withdrawals then?
b. Year after IRA owner’s death?
Permalink Submitted by Anonymous (not verified) on Wed, 2009-10-28 21:53
1. The taxpayer is never “officially” declaring a payout option to anyone. The default option, per IRS, is LE rule. If he does not take his first RMD by 12/31 of the year following the year of death (12/31/2006) he is assumed to have elected the 5-year option.
If LE was chosen (and he is on that schedule) he can skip 2009.
2. answer b. The son took an RMD in 2005 when he was not required to. It can not count towards the 2006 amount under the LE option. Obviously, if the 5-year option is chosen the only requirement is that the IRA is depleted by 12/31/2010.
pmk
Permalink Submitted by Alan Spross on Wed, 2009-10-28 22:43
According to WRERA, the calendar year 2009 is omitted in considering the years included in the 5 year rule. Therefore, if beneficiary elected the 5 year option when owner died in 2005, the deadline of 12/31/2010 is extended to 12/31/2011. WRERA therefore affected when the period ends, although it still began in 2006, so “b” is correct.
The other question about elections has been affected by PLR 2008-11028. This letter ruling allowed the life expectancy to be preserved if no distributions were taken out for a number of years, providing:
1) The IRA agreement made LE the default method, and most of them do. There could be a few exceptions, however, because they are NOT required to adopt LE
2) The taxpayer makes up all retroactive LE distributions AND pays the 50% excess accumulation penalty. This sounds expensive, but it’s not so bad if the beneficiary is young.
Here is Ed’s article on this ruling:
http://www.financial-planning.com/fp_issues/2008_7/saving-stretch613061-…