RMD for IRA that was given away in divorce
Hello,
I have a question. I have a client who turned 70 1/2 this year. At the end of last year, he had an IRA worth 350,000 and a 401K worth 150,000. His IRA was given to his wife in a divorce settlement this year. Thus, as of today, he only has the 401K plan.
When calculating RMD for this year, do I have to consider the 350,000 IRA? How does it work when he no longer has the IRA due to a divorce settlement but had the IRA at the end of the previous year?
Thank you,
Mike
Permalink Submitted by Alan Spross on Mon, 2011-08-29 21:19
Mike,
First time this situation has surfaced. If he has no other TIRA accounts to satisfy the RMD, he should have taken his 2011 RMD prior to the divorce transfer. In this case, there is no prescribed corrective procedure since there was no distribution that would have been deemed to include the RMD, only a non reportable transfer. For any other non reportable transfer he could have done, he would still have an IRA from which to take the RMD.
Therefore, he is probably stuck with the excess accumulation penalty since there is now no way to satisfy the RMD. It would be around 1.8% of the 12/31/2010 IRA balance. Of course, if he is in the 25% tax bracket, he saves 25% of that 1.8% by not having to pay ordinary income tax since there was no distribution.
In theory, I suppose the settlement could be amended to provide that the RMD be withheld from the transfer, and then have this amount transferred back to his IRA from which he could distribute it and satisfy the RMD. He would then have to pay the proceeds to the ex, and would have substituted the tax for the higher penalty. But this involves attorneys and both IRA custodians with likely snags in the process as well as costs. Still, if the attorney will admit to missing the RMD requirement and not charge for correcting the order, and the other parties cooperate, it would save him some money.