5 yr rule and Inherited IRA
Designated Beneficiary inheited an IRA from grandfather in 2003. Grandfather had not taken any distributions because he was not 70 1/2. Can the grandson use the 5 year rule or was he by default subject to the life expectancy rules? Trying to determine if the entire amount is taxable by the end of the 5th year or whether he should have begun rmd by end of 1st year following death. I understand the current rules but can’t determine the 2003 rules.
Thanks for your help
Permalink Submitted by Alan Spross on Fri, 2010-05-07 02:41
The current rules were in place by 2003.
When the IRA passes prior to the RBD, the default rule is life expectancy distributions with the 5 year rule applying if the beneficiary did not start life expectancy distributions on time. However, IRS letter ruling 2008-11028 allowed the lifetime stretch to be preserved if the beneficiary makes up the correct delinquent RMDs and files a Form 5329 to pay the 50% excess accumulation tax each year. Since the 5 year rule deadline of 12/31/08 has also passed, the choice is to proceed with the life expectancy RMDs and pay the 50% tax for 04-08 (09 RMD waived) OR take out the entire amount and then appeal the 50% penalty for “reasonable cause” per the Inst on p 6 of the 5329 Instructions.
The key issue for making the decision is whether the beneficiary would likely be able to maintain the stretch benefits or would need the money fairly soon. Grandson’s marginal tax rate would also play a roll as would the value in the IRA. If grandson is quite young, the 50% tax for 5 years may be worth considering.