Non-spousal Inherited IRA – RMD Calculation
New client transferred inherited IRA to our institution. Father died in 8/30/96 (DOB 11-12-22), with two daughters as beneficiaries. Our client is one of the daughters; she transferred her portion of the inherited IRA to our institution. Her birth date is 9/27/52.
Decedent’s IRA was split shortly after his date of death into a separate account for each beneficiary.
It appears the former institution was using the decedent’s life expectancy reduced by a factor of one each year to calculate RMD for our client.
May we now use our client’s (beneficiary’s) single life expectancy as per Table I and further stretch out the IRA or do we have to continue using the same table as prior institution?
Thank you
Cindy
Permalink Submitted by mk foss on Fri, 2010-06-25 23:17
Hello:
The RMD calculation is needed to avoid the 50% penalty on failure to withdraw enough from the IRA. You can always take out more and if you do it has no effect on the method used for subsequent RMDs.
The father passed away when RMDs were governed by proposed regulations that had been in place since 1987. The regulations were confusing and difficult to work with, which may have led to the methodology used for previous RMDs. Since the final regs came out, beneficiaries who inherited under the old regime were able to switch to the new method. Thus, the RMDs would be based on your client’s age the year after her father passed away reduced by 1 each year. She was 45 that year so the beginning factor would have been 38.8 – if my math is correct, you’d reduce it by 12 to get the factor for 2010.
Permalink Submitted by Alan Spross on Fri, 2010-06-25 23:53
I agree with Mary Kay.
Too bad that there were about 7 years in which your client took out excessive and incorrect RMDs since the prior institution apparently did not recognize the flexibility to change RMDs as a result of the more simplified 2002 RMD Regs. She will realize an immediate benefit from this change to your firm.
Permalink Submitted by Cindy Bragdon on Mon, 2010-06-28 17:33
Thank you for your responses. This confirms our theory that we can, indeed, change the method with immediate benefit to the client.
Permalink Submitted by Al Fry on Mon, 2010-06-28 17:41
Perhaps she should tell her sister about your firm.
Permalink Submitted by Cindy Bragdon on Mon, 2010-06-28 17:57
Does anyone know right off the top of your head what 2002 reg gives the authority to switch to the new method?
Permalink Submitted by mk foss on Mon, 2010-06-28 18:00
Read Section 1.401(a)(9)-1 Q&A 2-b that makes the new regulations effective for beneficiaries who inherit before 1/1/2003.
Permalink Submitted by Alan Spross on Mon, 2010-06-28 19:15
What is interesting in the “reconstruction” provisions of that Reg is that the divisor can be changed, but the designated beneficiary does not change. For example, if the separate accounts were not created by the deadline under the 1987 proposed RMD rules, the life expectancy of the oldest beneficiary would continue to apply under the current rules.
I know you indicated that the separate accounts were created promptly, but if they were not, the life expectancy of the oldest daughter would still apply even under the reconstructed RMD rules.