Inherited IRA question
My client’s mother passed away on May 29, 2012, she was 77, with several IRAs, and he has yet to roll them over into an inherited IRA and missed the 12/31/13 distribution deadline for an inherited IRAs. My question is does he have to pay the 50% penalty or is there a way to get around that and can he still roll the IRAs into his name. I don’t know if there is a time frame in which he had to roll the account over into an inherited IRA. I know that the 5yr rule doesn’t apply because his mother was 77 and started taking RMDs. Any insight on this matter would be much appreciated, thanks in advance.
Permalink Submitted by Alan - IRA critic on Tue, 2014-01-28 16:04
If he was the sole beneficiary of all the IRA accounts, missing the separate accounts deadline is not a problem. As for missing the RMD deadline as well, he can likely make up the shortfall ASAP and file Form 5329 with the 2013 return requesting a penalty waiver for reasonable cause using the best explanation possible. Note that he is also responsible for completing mother’s 2012 RMD if she did not complete it before passing. If that RMD was also incomplete, he will need a similar 5329 for his 2012 return with 1040X.
Permalink Submitted by Eric Woodfill on Tue, 2014-01-28 16:07
Thank you
Permalink Submitted by Eric Woodfill on Tue, 2014-01-28 16:13
He would have to pay the taxes on the IRA but is that considered earned income. I am only asking because he inherited the IRA and didn’t actively contribute to it. I apologize it is a dumb question.
Permalink Submitted by Alan - IRA critic on Tue, 2014-01-28 17:39
IRA distributions are not considered earned income for purposes of making regular IRA contributions. If Roth conversions would be a good idea for him, he could partially convert his own IRA and use the RMDs from the inherited IRA to pay the taxes on the conversion. However, note that conversions may not be beneficial considering his total financial situation. NOTE: Be sure he knows that he cannot take a distribution from the inherited IRA and roll it over to either an inherited IRA or his own IRA. Any change of IRA custodians must be done by direct transfer only. There is no solution if he takes a distribution he does not need due to the disallowed rollovers.