Inherited IRA (5-year rule)
What is the affect of leaving assets in an inherited IRA (non-spouse) for more than five years?
client passed in 2001 – non spouse beneficiary was recently made aware they were named sole primary beneficiary.
What happens if the beneficiary is/was a minor?
Thank you
Permalink Submitted by Alan - IRA critic on Tue, 2013-12-03 23:50
If beneficiary was a minor, they may be able to save their stretch by making up all the back RMDs 2002-2013 except 2009 and filing a Form 5329 to request waiver of the penalty. If the decedent had not reached their required beginning date at death, the 5 year rule technically applies, but of course that time limit is well since past, so there is nothing to lose by just making up the back RMD distributions and requesting a waiver of the penalty. Being a minor during much of this period may work in their favor. If they do not get a response, it means that IRS is OK with restoring the life time stretch for this beneficiary. While unlikely, the worst case scenario would be a requirement to distribute the entire account AND pay the penalty which would be around 50% of the average value, but again this is unlikely.
Permalink Submitted by ShipsnGiggles on Wed, 2013-12-04 21:45
AlanAs always I appreciate your insight. I have a follow up question. What are the tax ramification should the beneficiary elect to full distribution? The five year period ended 12/31/2006. Whta’s the effect of all post 2006 tax years? Thank you
Permalink Submitted by Alan - IRA critic on Wed, 2013-12-04 23:08
If the beneficiary did not attempt to restore the lifetime stretch and instead distributed the entire balance, they would be assessed with the penalty for the delinquent years. Note that the 5 year rule only applies if the decedent passed PRIOR to their required beginning date. If that were the case, there would be no penalty prior to 2006, but potentially a 50% penalty on the ending value in 2006. If decedent passed after their RBD, then the default is life expectancy and the penalty would only apply to the life expectancy RMD for each year starting in 2002. Either way, the beneficiary could request that the penalty be waived using Form 5329. Again, the 5 year period is only significant if decedent passed prior to their RBD.