RMD after Divorce and 70 1/2
A husband and wife officially divorced in December 2011. Both were over 70 1/2 and the husband had $1,200,000 in his IRA. During the divore proceedings, an agreement was put in place to whereby the husband was not permitted to tranfer or withdraw any funds from his IRA. The divorce was finalized toward the end of 2011 and the wife was awarded $450,000 of the $1,200,000. As a result of the divorce not being finalized until the end of 2011, the husband did not have time to take his RMD. He is now ready to take the RMD. We have three questions:
1. Since he was not permitted to touch his IRA until late December, which caused him to miss his RMD, he is taking his RMD now. To avoid the 50% excise tax, should he file Form 5329 along with a copy of the legal document stating that the IRA was not permitted to be touched. And also have him send in a letter with these documents stating why he missed the RMD at the end of 2011 in order to avoid the 50% penalty?
2. Now that he is taking out the RMD, how is the RMD calculated since the ex-wife was awarded $450,000? It doesn’t seem logical to take the account balance as of 12/31/2010 to calculate his RMD since that formula will be using money that the ex-husband no longer has. (Seems to be that he would be paying taxes on money that is not his anymore.)
3. Now that he is taking out the RMD that was supposed to be taken in 2011, will he owe the tax on the RMD for tax year 2012 or 2011?
Thank you!
Permalink Submitted by Alan Spross on Mon, 2012-01-23 23:24
[i]1. Since he was not permitted to touch his IRA until late December, which caused him to miss his RMD, he is taking his RMD now. To avoid the 50% excise tax, should he file Form 5329 along with a copy of the legal document stating that the IRA was not permitted to be touched. And also have him send in a letter with these documents stating why he missed the RMD at the end of 2011 in order to avoid the 50% penalty?[/i]
He should file the 5329 explaining briefly that is reasonable cause was a legal requirement related to a divorce concluded at year end. Copy of just the page with the provision should suffice. The IRS should allow the waiver.
[i]2. Now that he is taking out the RMD, how is the RMD calculated since the ex-wife was awarded $450,000? It doesn’t seem logical to take the account balance as of 12/31/2010 to calculate his RMD since that formula will be using money that the ex-husband no longer has. (Seems to be that he would be paying taxes on money that is not his anymore.)[/i]
Being researched, will post back
[i]3. Now that he is taking out the RMD that was supposed to be taken in 2011, will he owe the tax on the RMD for tax year 2012 or 2011?[/i]
Taxes follow the year of distribution. Therefore, he will have two taxable RMDs in 2012.
If he had any 8606 basis in the IRA, the basis would also be split in proportion to the principal and both spouses would have to file new 8606 forms.
Permalink Submitted by mk foss on Tue, 2012-01-24 02:06
Regarding the second question that Alan is researching. In an old ruling (PLR 9011031) the entire balance had to be used to determine the RMDs even though half of the balance was transferred to the former spouse. That result seems consistent with the rules that apply if one marries a sole-beneficiary spouse more than 10 years younger and wants to use the joint table.
Permalink Submitted by Jonathan Sard on Tue, 2012-01-24 13:27
So if the entire balance has to be used to calculate the RMD, is the husband responsible for taking the entire RMD from his remaining IRA and paying all the tax? It sounds like the ex-wife doesn’t have to take an RMD or pay any tax even though the money was transferred in 2011? Is that correct?
Permalink Submitted by Alan Spross on Tue, 2012-01-24 17:15
Apparently so. IRS Regs do not implicitly say so, but various Regs appear to point in this direction. I cannot pull up the PLR Mary Kay posted due to it’s age to determine how specific it is, but she is probably correct. Of course, this is only a single year problem and the 2011 RMD is based on the 2010 account balance.
In the transfer of retirement plans in an RMD year, the RMD must be withheld from the transferor plan, in this case it is his IRA. His attorney could have made provisions for the added tax bill in the settlement, but apparently this was overlooked. I assume the non reportable transfer was completed in 2011, if not then there is a two year problem instead of just 2011. Perhaps he should delay the 2011 RMD somewhat longer in order to research this further. Perhaps someone knows how to access this PLR of 22 years ago to see exactly what it says and/or if any Regs since would have affected it.
One thing is obvious here. The IRS is going to expect the full RMD to be taken out in total, so this is equally about locating any Reg that would require the transferee to distribute RMD amounts in proportion to the amount of the IRA awarded to her.
The IRA Regs indicate that RMD rules in 1.401(a)(9)-1 through -9 apply to IRA accounts unless specifically changed in 1.408-8. Therefore, while an IRA is not subject to QDRO rules, some of those rules may spill over to apply to IRA accounts when transferred incident to divorce. Unfortuneately, the QDRO Regs appear to be more focused on RMD requirements when the alternate payee (transferee) passes than year of transfer issues.
Permalink Submitted by Jonathan Sard on Tue, 2012-01-24 17:28
Thank you to both of you for your insight!
Permalink Submitted by Bruce Steiner on Tue, 2012-01-24 23:12
The text of PLR 9101031 is set forth below. I haven’t looked at the final regulations, which were issued after 1991, but the ruling appears to make sense. As Alan pointed out, the divorce agreement could have dealt with the required distribution. Of course, private letter rulings are not binding on the IRS except with respect to the taxpayer to whom they are issued, so the taxpayer may wish to consult with competent counsel (preferably someone other than the one who represented him in the divorce agreement in question).
***
text of PLR 9101031:
Private Letter Ruling
Number: 9011031
Internal Revenue Service
December 19, 1989
Symbol: E:EP:R:7
Uniform Issue List No.: 0408.06-00
This letter is in response to a request dated August 16, 1989, made on your behalf by your authorized representative, for a ruling regarding the minimum amount you may withdraw from your individual retirement arrangement(s) pursuant to section 401(a)(9) of the Internal Revenue Code.
The request is based on the following facts and representations:
You attained age 70 1/2 in 1988. During that same year, you were party to a divorce action. The decree of dissolution, entered on February 10, 1989, by a court having jurisdiction over the parties to the divorce action, provided for an equal division between you and your former spouse of your IRA(s). A qualified domestic relations order relating to the division was entered on March 16, 1989. One-half of your IRA account balance(s) was transferred in 1989 to your former spouse. You propose to base the minimum amount you are required to withdraw from your IRAs for the 1989 calendar year on the amount that exists in your IRAs subsequent to the distribution of one-half of the value of their assets to your former spouse.
Based on the above facts and circumstances, you request the following ruling:
That the minimum distribution for the 1989 calendar year from your IRA(s) be based on your life expectancy and on one-half the fair market value of your account balance in your IRA(s) as of January 1, 1989.
Section 401(a)(9) of the Code, in general, provides minimum required distribution rules applicable to plans/trust qualified under section 401(a).
Section 408(a)(6) of the Code provides that under regulations prescribed by the Secretary, rules similar to the rules of section 401(a)(9) (without regard to subparagraph (C)(ii) thereof) and the incidental death benefit requirements of section 401(a) shall apply to the distribution of the entire interest in an IRA of an individual for whose benefit the trust is maintained.
Question and Answer A-5 of section 1.408-8 of the Proposed Income Tax Regulations provides that for purposes of determining the minimum distribution required to be made from an IRA in any calendar year, the account balance of the IRA as of the December 31 of the calendar year immediately preceding the calendar year for which distributions are being made will be substituted in section 1.401(a)(9)-1 F-1 for the benefit of the employee. The account balance as of December 31 of such calendar year is the value of the IRA upon close of business on such December 31. However, for purposes of determining the minimum distribution for the second distribution calendar year for an individual, the account balance as of December 31 of such calendar year must be reduced by any distribution (as described in section 1.401(a)(9)-1 F-5(c)(2) of the proposed regulations) made to satisfy the minimum distribution requirements for the individual’s first distribution calendar year after such date.
There is no authority under either the Code or applicable regulations which would permit an individual to reduce the IRA account balance used to determine the amount of his/her required minimum distribution by amounts transferred to a former spouse, pursuant to a domestic relations order, after the date the applicable account balance is determined under the regulations.
Accordingly, with regard to the above ruling request, we conclude that the minimum distribution for the 1989 calendar year from your IRA(s) may not be based on your life expectancy and on one-half the fair market value of your account balance in your IRA(s) as of January 1, 1989.
In accordance with a power of attorney in this office, we are sending a copy of this letter to your authorized representative.
Permalink Submitted by Alan Spross on Tue, 2012-01-24 23:45
Bruce, thanks for posting that. I could not locate it using the IRS site or through google.
It appears to be exactly on point here. The fact that adjusting the IRA account balance for a delayed first RMD is no longer done appears to be immaterial to this ruling. Unless there is a later ruling that changes this result, it certainly appears that the IRA owner client of the poster will be subject to loss of some tax deferral and an added tax bill for 2011.
Permalink Submitted by Jonathan Sard on Wed, 2012-01-25 16:34
Thanks to all of you for your help!