Rollover of Beneficiary IRA

Submitted by James Carroll on Fri, 2014-08-29 16:41

I have a client that found out in 2013 that she was a beneficiary of an IRA of her father (father passed away in 2010). Requested a waiver (and waiver was granted) from the IRS for the 10% penalty on RMDs for 2011 and 2012. RMD penalty was paid on the 2013 tax return. Client wants to rollover the funds to a Beneficiary IRA with a new company. New company refuses to take the money unless a Private Letter Ruling is obtained from IRS indicating that IRS considers the funds “clean” and will not disallow the rollover at a later date. Anyone had this issue previously, and how was it resolved?



Submitted by Alan - IRA critic on Fri, 2014-08-29 18:39

  1. This does not make much sense to me. First, the excess accumulation penalty for missing RMDs is 50%, not 10%. But if a 5329 is filed for each of those years (2011 and 2012) requesting a waiver for a “reasonable cause” the waiver is typically granted. Usually the IRS does not reply so you must assume the waiver has been granted unless you hear otherwise. To get the approval, the delinquent RMDs must be made up and it sounds like that is what happened. The total distributions in the makeup year are taxable in the make up year, but there is no other penalty. You indicated a penalty was paid for 2013, but if the waiver had been granted, what penalty was paid and why?
  2. Now the balance is still with the original IRA custodian, and the only way it can be moved to another custodian is by direct transfer. There is no need to provide ANY of the prior detail to the new custodian, and it is not any of their business. RMDs are between the taxpayer and the IRS. Perhaps a different custodian should be elected than the one asking for a PLR as this is totally unnecessary, and in fact I have never heard of such a request. It may be interesting exactly what they want the PLR to approve, but from your post, this is a very normal situation and the client has a very sound reasonable cause since they did not even know they were the beneficiary.
  3. Note that a 10% penalty is for an early withdrawal. After the IRA owner passes, there are NO early withdrawals so there is never again a 10% penalty on an inherited IRA. The 1099R for inherited IRA distributions is coded 4 for death benefits and the code 4 should have been on the 2013 1099R.


Submitted by James Carroll on Fri, 2014-08-29 19:15

My mistake.  I meant the 50% penalty, not 10% (long week).  We did receive correspondence from IRS that they were waiving the penalty for 2011 and 2012.  The RMD should have been taken in 2013, but my client never took it.  Regarding the PLR, they want to make sure IRS is not going to come back in a few years and disallow the rollover.  According to Rev. Proc. 2014-1, IRS will not issue a ruling as a “comfort letter”.  I may be wrong, but this seems to be bordering on a comfort letter.



Submitted by Alan - IRA critic on Fri, 2014-08-29 21:33

  1. The penalty was waived for the 2011 and 2012 RMDs without having distributed those amounts in 2013? Or were they distributed but then the 2013 RMD was not, and client chose not to request another waiver for 2013 and paid the 50% excise tax on the 2013 RMD?  And if 2011 and 2012 RMDs have still not been taken, I have no idea whether the IRS could now revoke the penalty waiver. A strange combination of events.
  2. For inherited IRAs there are no rollovers, only distributions and transfers. Therefore, the IRS cannot allege that a transfer is void because it included funds that should have been distributed earlier for RMDs. Further, transfers are not reportable on Form 1099R or 5498. Accordingly, the new custodian has no reason not to accept a transfer and no custodial exposure to the IRS for anything related to prior RMD delinquencies. Now, the PLR request would make sense IF the client has taken a DISTRIBUTION and is trying to do an indirect 60 day rollover to the new custodian. The IRS will not make exceptions to that requirement, so if she has actually taken a distribution (check made out to her), then she cannot put the funds back into an inherited IRA and the lump sum will be taxable.
  3. In summary, getting the RMD obligations current with IRS requirements needs to be done if it is not done to date, but is not a reason for the new custodian to come up with unique requirements UNLESS client has taken a distribution that exceeds RMD requirements. A distribution from an inherited IRA is probably the most common and costly error made. Is this what happened?


Submitted by James Carroll on Tue, 2014-09-02 12:32

Alan, thank you so much for your input.  Regarding your first point, the RMDs were not taken until 2014.  However, client did not find out about being a beneficiary until 2013 (her dad died in 2010 and she thought her mother was the beneficiary).  So we requested penalty waivers for 2011 and 2012, and paid the penalty in 2014 on the 2013 tax return.I have spoken with the new custodian’s representative, and the new custodian is concerned that the IRS could come back and contest the transfer since the RMDs were not taken timely.  I’ve asked how could they have been taken timely if she didn’t even know she was a beneficiary until three years after the death of her father.  The new custodian is requesting a PLR, or advising the client to take the funds as a taxable distribution and then putting the after tax funds into one of their investment vehicles.  I’ve advised the client to either request the PLR or look for another company.



Submitted by Alan - IRA critic on Tue, 2014-09-02 17:43

There is no reason client could not have requested a penalty waiver for 2013 as well, but no sense trying to recover the penalty now. With respect to the new proposed custodian, I would strongly recommend they be removed from consideration ASAP. A non spouse IRA can only be moved by direct transfer, and there is no IRS Reg that requires an RMD be taken before doing a transfer, whether for a beneficiary or an IRA owner. Inherited IRAs are transferred all the time before the current year RMD has been taken and all the IRS cares about is that the RMD be taken before the calendar year ends. There should be no problem finding another custodian to accept the transfer of this inherited IRA. Client might want to complete the 2014 RMD before the transfer so she can indicate it has been satisfied, even though this is not a requirement.



Submitted by James Carroll on Tue, 2014-09-02 19:43

Thanks so much, Alan!  I truly appreciate your time.



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