Inherited IRAs – avoid imposition of the 5-year rule?

Submitted by Chip Simon on Mon, 2015-11-16 15:24

Young parents (46/49) died in simultaneous death in August, 2008 leaving various
retirement accounts (IRA,403b,Roth) to three surviving children
(ages at DOD = 23,21,15…all in school).

The executor (an uncle) decided to “leave all money where it is in parents’ names” so that
college financial aid would not be affected, especially for the youngest surviving child.
Much attention was paid to the welfare of the youngest child and his trauma. This
over rode attention to estate matters. Essentially, the money was “parked.”
NO distributions have been taken since date of death. Children are designated beneficiaries via per stirpes beneficiary designations.

Oldest child (now 30) is administrator and has just received letters testamentary this summer.
Accounts have been divided between 3 surviving children in October, 2015.
All balances (DOD and year end) have been retrieved from Vanguard.

Although I have computed amounts for all RMDs NOT taken for my client,
ignoring 2009 and 2015 (so far), we are in the “6th” year with no distributions.
My concern is that the deadline for the Designated Beneficiary’s election between
life expectancy payout and the 5-year rule appears to have passed since not a
dollar has been distributed since the DOD.

My questions are:
1. do you agree?
2. are there any rulings that might help get my client back into the life expectancy
election (and I would have him gladly pay the 50% penalty if that were the case)?

If this ends up with a one time distribution under the 5- year rule plus a 50% penalty,
my client forfeits significant “stretch” dollars.

Many thanks for any guidance.

Sincerely,

Chip Simon

========================================
Chip Simon, CFP®
Taconic Advisors Inc
Poughkeepsie, NY 12601
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845-486-5039



Submitted by Alan - IRA critic on Mon, 2015-11-16 16:06

  • Chip, IRS PLR 2008-11028 resulted in the applicant being allowed to re establish the LE stretch after 3 or 4 years of no activity. However, the contract must have LE as the default option and in that case the applicant also had to pay the 50% penalty for each delinquent RMD made up. Since that time, it is not guaranteed but entirely possible that a 5329 could also be filed for each year requesting the 50% penalty waiver for “reasonable cause”.
  • The 403b is more problematic and may still have the 5 year rule as default or a stated deadline to begin LE RMDs. The plan document should be examined before acting on the 403b RMD. The plan also has the authority to just distribute the balance as an LSD and may do so.  Either way, the 50% penalty waiver should be requested using a 5329 for each year. Note that stating that they were aware of the rules but intentionally did not act for financial aid purposes could well be denied as a reasonable cause.
  • Note that for plans where LE can be restored, the separate accounts were still not established by the deadline. Therefore any LE RMDs must be based on the age of the oldest child, but that would still produce a very long applicable distribution period. Also, for the inherited 403b, a direct rollover to an inherited Roth IRA is permitted for non spouse beneficiaries.
  • I assume that the simultaneous death statutes and plan provisions were sufficient for the beneficiary spouse to be treated as pre deceasing the plan owner, thereby triggering the per stirpes provisions and all custodians concur.


Submitted by Chip Simon on Mon, 2015-11-23 21:38

Many thanks for your feedback, Alan.I will have the client confirm the exact reason for the delay.



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