Inherited IRA Undistributed
Taxpayer died in 2001 with IRA at age 76. Nothing was done with IRA. It stayed with broker and no withdrawals were made. Daughter is sole beneficiary.
Account is transferred to a different broker in 2011 and the subject of distributions came up. There should have been distributions from 2002 forward.
1. Is there still a plan or did the plan become disqualified?
2. Would the plan become a taxable entity and liable for filing returns and paying tax from DOD until now?
3. Would there be a fiduciary return due form DOD until now?
4. Would the fiduciary be liable for filing retunrs and paying tax from DOD until now?
5. What would be the effect of any distributions received now?
6. Should the daughter-taxpayer compute distribution amount each year and report of Form 5329 with her amended 1040 return as underdistributed amounts and pay the 50% penalty?
7. Since years before 2007 are closed, do we start distributions in 2008, amend 1040 form and pay penalties?
Geralyn Suhor, Louisiana
Permalink Submitted by mk foss on Fri, 2011-09-16 18:22
1. The IRA does not become disqualified.
2. The IRA does not become a taxable entity.
3. No fiduciary return would be due. I’m assuming that the daughter is in fact the beneficiary and not an estate or trust.
4. See 3 above.
5. All distributions are taxed to the beneficiary when received. Life expectancy is the default method of paying distributions. The rules changed beginning in 2002 – which is the first year that a distribution was required. I’d advise that the missed distributions be determined for 2002-2008 and 2010 and removed from the IRA. The income tax on all of them would be due with the 2011 return.
6. Form 5329 is a stand alone form. No amended returns would be required. If the beneficiary has any hope of IRS waiving the penalty, she must take out all missed distributions. File Form 5329 for each year. Attach a statement that explains that ALL missed distributions have been withdrawn. Give a reason that this happened, hopefully something like “taxpayer received poor advice” or “taxpayer thought she had to wait until she was 70.2” An excuse that mentions avoiding income tax would not be a good idea.
The penalty does not have to be submitted with the Forms 5329 – if IRS does not waive the penalties, they’ll bill for the penalties.
7. I would start distributions as of 2002. You could just file Form 5329 for the “open years”, but IRS would treat the waiver request more favorably if she withdraws all amounts. Be aware that the 50% penalty is not an income tax, it’s an excise tax. Failure to file form 5329 for an excise tax, keeps the statute open. I believe it’s necessary to file Form 5329 for all years.
Good luck.