Beneficiary IRA Distribution
I have a new client that in 2005 received a beneficiary IRA from her father’s death. Her stock broker misadvised her about taking out the IRA. He told her she did not have to do anything with the IRA for 5 years and on the 5th year the broker had her take a small distribution. In 2011 she changed brokers and this broker told her she should have taken all the distribution on the 5th year. Now, I’m not sure how to counsel her on this, is there something you know of that she or I can do to rectify the situation?
Permalink Submitted by Alan Spross on Tue, 2011-12-06 22:49
The 5th year is actually this year, as explained below.
Their refererence to the 5 year rule suggests that the IRA owner passed prior to the required beginning date. By 2005, the vast majority of IRA contracts had been amended to conform with the IRS RMD Regs making the life expectancy option the default rule, with the 5 year rule as a beneficiary option. Then in 2008, the IRS released PLR 2008-11028 which allowed a beneficiary to restore the lifetime stretch. However, this comes with a cost because the beneficiary had to make up all the delinquent annual RMDs and pay the 50% excess accumulation tax on each one of them. That’s gets expensive after 5 years unless the beneficiary is very young.
While the PLR did not indicate how many years this option would be allowed, the cost begins to make it prohibitive after awhile. In this case, since 2009 RMDs were waived, the 5 year period ends 12/31/2011. You might calculate the 2006, 07, 08, 10, and 11 RMDs with the 50% penalty on the first 4. Another more aggressive option is to request that the IRS waive all the penalties for reasonable cause using Form 5329, but they may well not grant the waiver.
The other option is to simply drain the account by year end and the entire balance will be taxable in 2011. The decision would be affected by the beneficiary’s age and therefore the size of the RMDs and of course the size of the account vrs the value to the beneficairy of trying to restore the stretch.
Here is a copy of Ed’s article on this PLR:
http://www.financial-planning.com/fp_issues/2008_7/saving-stretch-613061…