Beneficiary IRA RMD Penalty Question
As I understand the rules for beneficiary IRA’s, you have until Dec 31st of the year following the date of death to set up a beneficiary IRA and begin taking RMD’s over one’s lifetime. If the RMD is not taken, a person must distribute the entire IRA within five years. My questions is: If the beneficiary doesn’t take his RMD AND fails to distribute the balance within five years, what percentage is the IRS penalty on the balance? Is it 10%, or is it the same as someone over age 70 1/2 who fails to take their RMD: 50%?
Thanks
Permalink Submitted by Alan Spross on Fri, 2012-08-17 17:47
It would be 50%.
The 5 year rule only be used for death prior to the required beginning date or to Roth IRAs since for a Roth there is NO required beginning date (no RMDs for the owner). And even then, life expectancy is the default rule for designated beneficiaries, not the 5 year rule. Nearly all IRA agreements now contain language making life expectancy the default rule. There does not have to be an election made by the beneficiary.
Further, the IRS in PLR 2008 11028 has allowed a beneficiary who has missed llife expectancy RMDs to preserve life expectancy RMDs by taking out all the missed RMDs and paying the 50% penalty for each year missed. Of course, if the beneficiary ELECTS the 5 year rule, they can still use it and avoid any penalty if the IRA is drained by the end of the 5 years. The IRS has also waived the 50% penalty for many reasons if a taxpayer files Form 5329 and follows the 5329 Inst, p 6 and makes up the missing RMDs. This leniency can probably be attributed to the severity of the 50% penalty.
Here is Ed’s article on the above letter ruling:
http://www.financial-planning.com/fp_issues/2008_7/saving-stretch-613061…
Permalink Submitted by John Boyle on Fri, 2012-08-17 17:57
Thank you