Advice on overdue MRD from Inherited IRA

Submitted by Russ Hillman on Tue, 2015-12-01 00:12

Hello,

I’m looking to get some advice on an Inherited IRA that I have not taken any distributions on, heres the background.

My mother passed away in January 2008. I was contacted by mail from her retirement 401k company that I was listed as a beneficiary (and my brother was too). So I contacted my retirement broker (Fidelity and asked them what needed to happen). I don’t remember the details but I made sure before the year was over, that I had the account transferred to Fidelity into a IRA-BDA, so I never saw a dime, and it would go right into a IRA account which shows the original owner my mother and me as the custodian.

I did take care of that, and thought I was done or rather, could let it continue to grow and would not have to do anything with it until 59 1/2. My brother just had them send a check for his half. Now the amount was not a lot, I received 2200.00 and my brother got the same. I figured I was being wise by investing it, and infact it is now 5500.00

However, I just received last week a letter from Fidelity stating I have to take a minimum MRD before dec 31 each year on this account. I don’t recall receiving a letter like that before, so this caught my attention. I looked online and saw that I was suppose to of taken a minimum MRD each year after the first year of death, or cash it out at year 5, of which I haven’t done anything.

I called fidelity, and told them about the letter, and they said this is the first year they have sent the letter, so no wonder I didn’t realize it in years past. Anyway, they said I need to take the MRD before this dec 31, and I would need to take the prior years I didn’t take.

She passed in 08′, and they said it would of started in 09. Now I read online that 09′ was a bad year so I think it was exempt that year? Fidelity also said I would need to get with a CPA to determine my tax implications. If I’m understanding what I read on the internet correctly, the IRS can take up to 50% of what I should of taken out as MRD each year.

First of all my mother was age 60 when she passed in 08′, and I was 37 in 08′, so she wasn’t taking any MRD yet. The amount was 2200.00 then and was so up til last year. I looked online at the MRD chart based on age, which looks like I would use my life expectancy of 38 then ( but do I skip 09′ and start in 10′ which I’d be 39 then). Take the MRD for each year and fill out some 5329 I think it is? Am I suppose to fill one of those out for every year and include it with this years taxes?

I did not have a clue I was suppose to be drawing on that, why would would I, I’m not retired yet. I believe in 10′ I was getting divorced, in 11′ I was selling my house and moved. and in 12′ I took another job and moved out of state, I just had too much stuff in my head to be sitting around wondering about retirement papers.

I guess the bottom line is I can certainly go to a CPA, usually I do my own with Turbo Tax, but I really don’t want to spend a few hundred dollars to do my taxes (1040ez), since I don’t own a house now, just to correct some paperwork for extra money (a hundred dollars a year). Could someone please give me some advice here on this? Can I/Should I just clear this up myself or is it something I will just have to eat as one of lifes learning experiences?

Thanks for any input.
Russ



Submitted by Jose Morales on Tue, 2015-12-01 01:02

Hello Russ,  as a non-spouse beneficiary your options when your mother passed were to either begin taking RMDs based on your single life expectency (reduction method) the year following the year your mother passed or have the account completely closed out by the fifth year following the year your mother passed.  If you miss an RMD you would default to the 5 year rule, which would have had you close the inherited IRA by the end of 2013.  At this point you have two options.  1) close the account and file form 5329 for 2013 and 2014 calculating the excess accumulation penalty that would be owed for not closing the IRA in a timely manner, then asking the IRS to forgive the penalty based on the circumstances you laid out.  The chances are good that they would forgive the penalty and you would only owe taxes on the distribution taken this year.  The other option is to attempt to restore your single life expectancy RMDs.  This would involve both taking all past RMDs that you would have taken had you been more informed of the distribution rules from inherited IRAs, filing form 5329 to calculate the penalty owed for each year that an RMD was not taken (you can exclude 2009 as no RMDs had to be taken), and requesting a written determination from the IRS to restore the single life expectancy option. (side note:  you would start by determining your single life expectancy factor in 2009 even though no RMD was required for that tax year, then you subtract from that factor by 1 each year thereafter).  The IRS can either allow you to continue taking RMDS based on the single life method provided you pay the penatlry due for all past due RMDs to date, or stick to the book and determine that the account should have been closed by the end of 2013 at which point you will need to close the inherited IRA and you would owe the penalty for 2013 and 2014 rather than all the prior years an RMD would have been taken under the single life method.  Given the dollar amount you provided, I personally do not think it’s worth bringing in a CPA or attempting to get a favorable ruling from the IRS.  I’d be happy closing the account and hoping the IRS forgives the 50% penalty for 2013 and 2014 (which I believe there is a good chance of obtaining).



Submitted by Russ Hillman on Tue, 2015-12-01 02:24

Thanks for the reply,I think it would be easier to just close the account, and start a new IRA with it or roll it into another IRA I currently have. This form 5329, for 2013 and 2014, I looked at that form online, do I fill out two seperate 5329’s for each year? Or do I just fill out one and calculate the amount I was suppose to of taken out each year and include that with my letter asking for forgiveness of penalty’s? Also, I would assume I need to close it out before the end of the year, otherwise I have an additional year of mrd’s I need to calculate in there too. Can I send this 5329 with my letter in by themselves, or are they suppose to be done with my taxes next april?Thanks for you time and suggestions.Russ 



Submitted by Alan - IRA critic on Tue, 2015-12-01 02:28

  • I agree that you can probably handle this issue with our advice and save yourself the cost of an accountant, most of whom know less about this specialized issue than those of us to respond on this site.  Unless you are maxing out your current retirement plan contributions, I suggest that you withdraw the balance from this inherited IRA and use the funds to increase the contributions you make to your own retirement plan that will not have any RMDs till you hit 70.5. This is also easier from a filing and penalty waiver standpoint.
  • The 2009 RMD waiver allowed 2009 to be ignored for purposes of the 5 year rule. Therefore, under the 5 year rule, the account had to be drained by the end of 2014, not 2013. You would withdraw the entire amount and it would be taxable this year, but the amount is small enough that it will probably not increase your marginal rate. You would file a 5329 with a 1040X for 2014 requesting the penalty waiver for “reasonable cause”, the reason being no notification of RMD requirements until this year. Include a copy of the distribution statement  and state that as soon you were aware of the requirements, you distributed the entire balance. So only one 5329 needs to be filed. While it may be too late to add to your retirement contributions if you have a 401k, you can contribute to an IRA for 2015 until next 4/15. Perhaps the new contributions can be deducted and that would offset the taxes you would owe on the inherited IRA distribution.
  • If you still wanted to stretch the inherited IRA, you would need to calculate the RMD due for 2010-2015 and see if the IRA custodian will cut a separate check for the calculated amount for each year and show a separate entry on your statement for each of the 6 distributions. You would need to know the year end balance and use the correct Table I RMD divisor to know the amount of each check to request. Then you would need to file a 5329 for each year to request the waiver, but the explanation will be the same. The IRS has allowed the stretch to be restored under letter ruling 2008-11028, but in that case the IRS did collect the 50% penalty. I think your chances for both the penalty waiver and restoring the stretch are not as good as using the full distribution and single year 5329 for 2014. I doubt that you would want to restore the stretch if it meant having to pay the 50% penalty for years 2010-2014.
  • If you decide on one or the other, please advise and more detail about filing the 5329 can be provided.


Submitted by Russ Hillman on Tue, 2015-12-01 17:05

Thanks for the replies.I would just assume deal with less headache and therefore continuing to try and get the stretch seems like more work and more of a loss with penalty’s. I will call and close (withdrawl) the entire account this week. I’ve only got one pay check left from my employer this year to possibly try and raise 401k contributions to lower my agi this year and I don’t know there is enough time left to do that.I know I have read on the internet I can rollover this inherited ira to a roth ira but that will do nothing to lower my year end agi, is it possible I can have fidelity convert it to a traditional ira, which I can use then to lower my agi for this year or am I just going to have to eat an additional 5grand in agi. I wouldn’t really sweat it but I sold some stocks this year that did pretty well and that is already going to bump my agi by about 5grand itself.Thanks, Russ



Submitted by Alan - IRA critic on Tue, 2015-12-01 17:34

I know it is late in the year to up your 401k contributions much, therefore the offsetting income to the inherited IRA distribution might have to be split between 2015 and 2016.  You cannot convert an inherited TIRA to an inherited Roth IRA, owned Roth IRA, or owned TIRA.  And if you put off the distribution till next year, it would result in another potential penalty for 2015 and another 5329. So you probably need to be satisfied with getting the offsetting tax breaks in both years. If you have LT gains on the stock sales, the rate is still 0 unless the higher AGI from the gains and the inherited IRA distribution pushes you into the 25% bracket.



Submitted by Russ Hillman on Tue, 2015-12-01 18:05

How would I split the income from the ira between both 2015 and 2016? If I call and withdrawl the entire account or close it, wouldn’t it reflect all of 2015 income?Appreciate your patience and willingness to explain this out to me. I thought I was kind of savvy at this stuff but shows how much I really don’t know. 



Submitted by Alan - IRA critic on Tue, 2015-12-01 18:23

I should have indicated that the split was for the offsetting DEDUCTIONS from contributions to retirement plans that would offset the income realized this year from the inherited IRA distribution. In other words, you would have 5500 in taxable income this year from the distribution, might be able to offset that by 1,000 or so by increasing your 401k contributions before year end, but the other 4,500 in offsetting 401k contributions would not be realized until 2016.



Submitted by Russ Hillman on Tue, 2015-12-01 22:26

Oh okay, got it. Well I just called payroll and had them kick my 401k to 35%, which will take a pretty big bite out my check but that should reduce the income they can tax me this year for at least one check. Wish I would of known to start this ball rolling sooner, few more check cycles would of been awesome, oh well. If I leave it that way for next year for a check or two then I should get a some back next year so to speak. As to the 5329 and 1040x, I just download those off the internet, fill them out, and send them in the next couple weeks?



Submitted by Alan - IRA critic on Tue, 2015-12-01 23:49

Yes. To properly complete the 5329 complete the lines as follows:

  1. Line 50 – enter the full balance in the IRA as of 12/31/2014, which is the final day of the 5 year rule period.
  2. Line 51 – enter 0  (do not leave blank)
  3. Line 52 – on the solid line enter the same figure as on line 50; on the dotted line enter “RC waiver requested for all of line 52”. You will explain your reasonable cause (RC) on a separate sheet and also include a copy of your distribution statement.
  4. Line 53 – enter 0 (do not leave blank). Filing this form will also start a 3 year statute of limitations for you. Good chance you will not here further from the IRS which means they accepted your waiver request.


Submitted by Carol Lawrence on Tue, 2015-12-29 15:07

Sadly, I can confirm that Fidelity (until mid-November 2015) utterly failed to send legally-required RMD notices to any of its inherited IRA beneficiaries. This information was given to me by a Fidleity customer service represenative.   I was told the failure was “policy.”The RMD for any tax year must be made by the close of that tax year.  Here are the citations of Fidelity’s legal obligation to have sent annual notices: Treas. Reg. 1.408-8 Q&A-10; IRS Notice 2002-27.  We will be filing a Form 5329, and will be requesting a Reasonable Cause (RC) waiver.BTW, the instructions from Alan-iracritic on the waiver request are NOT correct.  The correct procedure is:

  1. File a separate Form 5329 for each year.  Attach distribution check and letter explaining RC with each Form.
  2. Prior year forms must be submitted for prior years.  Get them here:  https://apps.irs.gov/app/picklist/list/priorFormPublication.html;jsessionid=RVfmzB5Rh6ybiZsoJqCO5w__?value=5329&criteria=formNumber&submitSearch=Find 
  3. In box 50, enter the RMD for the year being filed
  4. In box 51 enter the numeral 0
  5. In box 52 enter the numeral 0
  6. On the dotted line immediately to the left of Box 52 write both 1) “RC” and 2) in parenthesis, enter the numeral you placed on box 50
  7. In box 53 enter the numeral 0

  



Submitted by Alan - IRA critic on Tue, 2015-12-29 17:11

The purpose of this post is to correct some misinterpretations in the prior post by Consumer:

  • Fidelity would not have a policy contrary to IRS requirements. Notice 2002-27 contains certain requirements for RMD reporting for IRA owners that do NOT apply to inherited IRAs. For an inherited IRA, the custodian must only provide the year end value. In many cases there is no way for the custodian to calculate the RMD because there are several exceptions to calculating beneficiary RMDs from the normal situation. Any additional assistance the custodian offers is voluntary. Fidelity’s failure therefore appears to be limited to the rep’s inability to explain this background.
  • My prior post regarding 5329 completion applied to the OP in this thread under some unique circumstances. The 5 year rule applied in that case, therefore the RMD after 5 years was the entire remaining balance of the IRA. There is no 5329 required for years prior to that because there were no RMDs under the 5 year rule until the end of the 5th year.
  • The data on the various lines of Form 5329 for required years similarly reflect that particular situation.

 



Submitted by Carol Lawrence on Sun, 2016-01-10 20:20

Thank you, Alan, very helpful!And thanks for confirming that your instructions are specific to a five-year spouse beneficiary, and not a non-spouse beneficiary under an inherited IRA.  My instructions cover the latter’s situation.I’ll reserve my right to respectfully disagree about whether Fidelity failed its legal obligaitions in failing to provide annual RMD notice to inherited IRA beneficiaries.  I’m certainly citing Fidelity’s failure & Notice 2002-27 & Reg. §1.408-8 Q&A-10 in my Reasonable Cause Form 5329 filing.  The IRS guidance I cited does NOT distinguish traditonal IRAs from inherited ones.  Nor does the underlying RMD requirements of Code §401(a)(9)(B) or its regs.  There is NO Code-derived reference to “inherited IRAs.”  (See Code §401(a)(9); Reg. §§ 1.401(a)(9) -3; -5; -8.Instead, there is only Code §401(a)(9) and its regulations, which dictate RMDs from the nonspouse and spouse beneficiaries of IRAs, and IRS guidance that requires IRA custodians to send annual notices with regard to the RMD obligations of ALL IRAs.  I’m calling foul on Fidelity.  And as they have now in 2015 newly decided to issue annual RMD notices to inherited IRA beneficiaries, they may perhaps agree with me.  



Submitted by Carol Lawrence on Sun, 2016-01-10 20:21

Thank you, Alan, very helpful!  And thanks for confirming that your instructions are specific to a five-year spouse beneficiary, and not a non-spouse beneficiary under an inherited IRA.  My instructions cover the latter’s situation.  I’ll reserve my right to respectfully disagree about whether Fidelity failed its legal obligaitions in failing to provide annual RMD notice to inherited IRA beneficiaries.  I’m certainly citing Fidelity’s failure & Notice 2002-27 & Reg. §1.408-8 Q&A-10 in my Reasonable Cause Form 5329 filing.    The IRS guidance I cited does NOT distinguish traditonal IRAs from inherited ones.  Nor does the underlying RMD requirements of Code §401(a)(9)(B) or its regs.  There is NO Code-derived reference to “inherited IRAs.”  (See Code §401(a)(9); Reg. §§ 1.401(a)(9) -3; -5; -8.  Instead, there is only Code §401(a)(9) and its regulations, which dictate RMDs from the nonspouse and spouse beneficiaries of IRAs, and IRS guidance that requires IRA custodians to send annual notices with regard to the RMD obligations of ALL IRAs.    I’m calling foul on Fidelity.  And as they have now in 2015 newly decided to issue annual RMD notices to inherited IRA beneficiaries, they may perhaps agree with me.    



Submitted by Alan - IRA critic on Mon, 2016-01-11 02:16

Consumer, you are referring to the correct documents, but have missed the key provisions in Notice 2002-27. This is the latest notification guidance the IRS has released on inherited IRA RMDs. The following is copied from Notice 2002-27: 

Reporting is also not required at this time with respect to IRAs of deceased owners. Accordingly, no reporting is required for Roth IRAs because there are no lifetime minimum distributions required for Roth IRAs. If reporting is required in the future for section 403(b) contracts or IRAs of deceased owners, the IRS will issue additional guidance, which will be effective prospectively.

             



Submitted by David Mertz on Mon, 2016-01-11 02:22

In addition to IRS Notice 2002-27 explicilty stating that such reporting of RMD amounts is not required with respect to IRAs of deceased owners (in this case IRAs maintained for the benefit of the beneficiaries), IRS Pub 590-B, page 2 reiterates this by saying:  No report is required … for IRAs of owners who have died.  Note that the beneficiary of an IRA inherited by a non-spouse is not the owner of the IRA.  The owner dying does not cause a change in ownership.



Submitted by Carol Lawrence on Tue, 2016-01-12 13:25

Hah, looks like I failed the first rule of statutory construction:  keep reading.     Thank you Alan and DMx.   



Submitted by Alan - IRA critic on Tue, 2016-01-12 16:05

That does not mean that you still cannot get the penalty waived by filing a 5329 citing your “reasonable cause”. Unless you have a better reason, you could always indicate that you did not receive any notice from the custodian and overlooked the RMD. If you made up the missed RMD, good chance that the penalty will be waived. In many of these cases you never hear back from the IRS meaning they accepted the request.



Submitted by Carol Lawrence on Mon, 2016-03-21 13:13

I am pleased to report that the IRS has GRANTED my waiver request, filed as I described above.  (This is Consumer, who posted above.)  The response came in about 12 weeks. Interestingly, my siblings-in-law — who shared my issues precisely — were advised by their CPAs (and Fidelity!) to just let it go, that the IRS would not bother them.  They took that advice.   Thank you again, Alan and DMx.



Submitted by Darrin Patrick on Tue, 2016-04-05 16:33

My situation is almost identical to the original poster.  My sister passed in 2008 and I too was unaware of the need to take RMDs on the account due to her and my age.  I did have it move into my own name after her death in 2008.  I did fully close out the IRA-BDA account prior to the end of 2015.  My questions are in regards to Alan’s notes above.  I also notice the line numbers have changed on the 2015 form with the waiver information starting on line 52 now.  Here are my questions.

  • Line 52 (formerly 50):  Per Alan above, he stated to put in the number at the end of 2014.  Why would this not be the full amount I distributed in 2015?
  • Line 53 (formerly 51):  Is this entered as 0 due to the requesting the waiver on the full amount?  It is confusing since it says “Amount actually distributed to you in 2015”.  

 My account was also with Fidelity and this is the first year I ever recall getting a letter from them about this.  The amount in this account is substantially pushing me into a higher bracket and I’m fully prepared to pay that tax.  I just want to make sure I file properly with the waiver request to avoid the high penalty if at all possible.Thank you in advance for any advice.  This is the last thing outstanding before I file this year.



Submitted by Alan - IRA critic on Tue, 2016-04-05 18:47

  • The IRS guidance on 5 year rule waivers is lacking, so we are improvising here. You would add 2 to the line numbers for the current 5329, as you indicated. However, you would be subject to the 5 year rule ONLY if your sister passed prior to her required beginning date, so be sure that is the case. It sounds like you want to file a 2015 5329 and not a 2014 5329 which would have been the first penalty waiver year. If you want to file only a 2015 5329 then you would show the total value when distributed in 2015 and request a waiver on that amount. My earlier post assumed filing a 2014 5329 with a 1040X and using the 12/31/2014 value because that was the day a full distribution was required. If that value increased by the time the full distribution was taken out in 2015, the IRS could take the position that you owe the penalty on that increase as well, but it really only matters if the waiver is denied. So if you want to pass on the 2014 5329, then on your 2015 edition you should probably show the RMD as the value when distributed OR the value on 12/31/2014 whichever is higher.
  • Either way you will probably get the waiver and I have no idea which method the IRS would prefer. Filing a 5329 for more than one year with a 5 year rule RMD would probably confuse the IRS.


Submitted by Darrin Patrick on Wed, 2016-04-06 18:20

Thank you for the help.  Yes, my sister was just shy of 52 years old.  Also, the value was more at the end of 2015 than 2014.  I’ve been reading up on this for months now.  So I think I’m as informed as I can possibly be for this filing. Wish me luck on the wavier.



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