Inherited IRA Help
I have a client who is 39. She inherited an IRA. She was designated beneficiary. Is 5 year rule still in effect? Or, does she have to take a RMD in the year following the date of death based on her single life expectancy?
I have a client who is 39. She inherited an IRA. She was designated beneficiary. Is 5 year rule still in effect? Or, does she have to take a RMD in the year following the date of death based on her single life expectancy?
Permalink Submitted by Edward Czapor on Fri, 2009-12-11 16:24
The 5 yr. rule could only apply if the IRA owner died before their RBD. If that is the case then she would have to elect the 5 yr. rule since life expectancy is now the default rule for a designated beneficiary. There generally is no good reason to elect the 5 yr. rule since any amount can always be withdrawn that exceeds the RMD in any year, including the entire account. If death occurred after RBD, then at least an RMD must be withdrawn in the year after death and the 5 yr rule does not apply. She should also check to see if the IRA owner had any basis in the IRA due to non-deductible contributions, since any basis would carry over to her distributions lowering the taxable amount.
Permalink Submitted by Alan Spross on Fri, 2009-12-11 18:02
And remember that the 2009 RMD has been waived. While your beneficiary is probably a non spouse, note that spousal beneficiaries have different options regarding the inherited IRA.
Permalink Submitted by [email protected] on Sun, 2009-12-13 22:48
The deceased died in early 50s, way before RBD. If you were to go 5 year rule where would you elect? Custodian? IRS? And if you wanted to stretch in this case, then the first RMD would be in year following year of death, Correct?? Thanks.
Permalink Submitted by mk foss on Mon, 2009-12-14 00:22
Life expectancy is the default. Normally one shows that they are using life expectancy by taking the first distribution in the year after the death. You “elect” the five-year rule by failing to take a distribution in the year after death.
Penalties apply when a beneficiary does not take out the required minimum distribution (RMD) but there is no maximum distribution. A beneficiary could withdraw the entire amount at any time without penalty. The RMD for a 39 year old is very small so there would be little difference in taking RMDs for a few years and then taking out the balance in the 4th or 5th year, if that’s what they’d like to do. The penalty is huge if you miss taking the distibution in the final year with the 5-year rule.
Recently, the IRS has allowed beneficiaries of young decedents to elect life expectancy even though they did not take the first couple of distributions on a timely basis. The 5-year rule does not mean that you withdraw benefits one-fifith per year; most who use it take out the entire balance in the final year so it isn’t a tax-saving method.
For decedents passing away in 2008, presumably the first life expectancy RMD would be necessary in 2010.
Permalink Submitted by Edward Czapor on Mon, 2009-12-14 00:38
To stretch the first RMD would be due in year after death as you stated, and the RMD schedule would have to be adhered to in subsequent years, but any amount in excess of the RMD can always be withdrawn includuding the year after death. The 5 year rule is elected by skipping withdrawals of at least the RMD amounts in any years up to the 5th year after death, but then the account must be drained by the end of this 5th year. Again why do this unless there are tax years you would not want additional income from an RMD, or you want to concentrate income into certain years and the IRA income is needed within 5 years. The stretch option gives more flexibility with no less access to the funds if needed.