late notice to IRA beneficiary
I received notice last month that I am the beneficiary of an IRA owned by a distant relative who died in 2007 at age 55. I am 25. The IRA holds a variable annuity with a value of $45,000.
I want to roll the deceased’s IRA into an inherited IRA. It’s my understanding that I now have to take the RMDs for 2008, 2010 and 2011 and pay 50% of the 2008 and 2010 RMDs as penalties (RMDs for 2009 were suspended). Does anyone know of a way to legally avoid paying the penalties since I was not notified of the existence of the IRA until last month?
Secondly, if I do have to pay the penalties, can I file a Form 5329 with my 2011 tax returns to cover the combined ’08 and ’10 penalties (even though the form will refer to penalties related to not taking a 2011 RMD) or will I have to file amended returns for ’08 and ’10?
Permalink Submitted by Alan Spross on Sun, 2011-10-16 17:41
You won’t have to file the 1040X, since the two 5329 forms can be filed alone (2011 of course can be taken on time). But you need to download the 08 and 2010 editions and complete them according to the 5329 Inst, p 6. If you have any way to prove that you did not know about the inherited IRA include such documentation with a request to waive the penalty for each year, and also send a statement from the IRA custodian showing that you have distributed the amount that adds up to the two RMDs for those years. There is a chance that the IRS will waive the penalties, although the RMDs at your age and therefore the penalties would not be that bad if the IRS did not waive them. You will not need a 5329 with your 2011 return, but all 3 RMDs will be taxable in 2011.
According to PLR 2008 11028, this will restore your ability to stretch this IRA over your life expectancy and avoid the 5 year rule. While that PLR concluded the penalty would be charged, there is no downside to at least filing the waiver request. Hopefully, there will not be a surrender charge from the insurance company for taking these distributions.
Be sure that any funds you move to another custodian are done by a direct trustee transfer. Any check made out to you is irrevocably taxable and cannot be rolled over in an indirect rollover.