Permalink Submitted by Alan - IRA critic on Wed, 2024-09-25 14:22
They notify the IRA (or qualified plan) custodian of this election by no later than the end of the year following the year of death. The election is irrevocable. This election is usually not beneficial, and there are also major complications if the EDB is a surviving spouse and plans a spousal rollover later on.
Permalink Submitted by Alan - IRA critic on Thu, 2024-09-26 00:00
This is a gray area. Most all IRA contracts specify life expectancy as the default rule for EDBs and the IRS has not stated that failure to take a LE RMD automatically defaults that beneficiary into the election to opt for the 10 year rule. Therefore, in this situation I would recommend that the beneficiary should make up the missed RMDs and file Form 5329 to request the penalty waiver.
The final Secure Act Regs do not address the result of no action whatever by the end of the year following the year of death. Qualified plans are probably more likely to contain their own rules regarding the election, and some may also stipulate that the 10 year rule applies.
Permalink Submitted by Rick Herndon on Thu, 2024-09-26 13:21
Thank you.
So correct me if I’m wrong.
If the EDB fails to take the RMD’s for a full ten years and the IRS finally comes back and bills for the missed RMDS, the 5329 waiver would still be available for all of those years, and at most would result in a 10% penalty for all of the missed RMD’s.
So given the fact that this person will be in the 0% tax bracket when they retire and is in the 22% bracket until they retire, it would probably make more sense to do nothing at this time.
Permalink Submitted by Alan - IRA critic on Thu, 2024-09-26 20:39
There is a new SOL for excess accumulations based on Form 1040, rather than Form 5329. It’s 3 years after the tax return for the missed RMD year is filed. For example, if an RMD was due for 2024 and not taken, and the 2024 return is filed in April, 2025, after April, 2028 the IRS can no longer assess a penalty for the 2024 missed RMD. But if the taxpayer does not want to gamble that they can run out the SOL they must take the missed RMD and file the 5329 either to pay the reduced penalty or request the penalty be waived as in the past.
An IRA custodian cannot force out what they think is the RMD and it’s highly unlikely that the IRS will know which beneficiary is an EDB or a 10 year rule beneficiary. However, if there is an audit and the IRS does catch the missed RMDs before the beneficiary self corrects, the penalty will be 25%, not 10% and could include other penalties such as late interest. The IRS has been highly inconsistent regarding these additional penalties. It might also be expected that due to the reduced penalty %, at some point the IRS will levy more penalties and stop accepting total penalty waiver requests with Form 5329.
Given all this, and lack of clarity on defaulting into the 10 year rule, it is impossible to predict whether there will be more clarity in the near future and/or how enforcement evolves.
Permalink Submitted by Alan - IRA critic on Wed, 2024-09-25 14:22
They notify the IRA (or qualified plan) custodian of this election by no later than the end of the year following the year of death. The election is irrevocable. This election is usually not beneficial, and there are also major complications if the EDB is a surviving spouse and plans a spousal rollover later on.
Permalink Submitted by Rick Herndon on Wed, 2024-09-25 20:37
What if the IRS custodian was not notified by that time, but no distributions have been made? The person died before his RBD.
Permalink Submitted by Alan - IRA critic on Thu, 2024-09-26 00:00
This is a gray area. Most all IRA contracts specify life expectancy as the default rule for EDBs and the IRS has not stated that failure to take a LE RMD automatically defaults that beneficiary into the election to opt for the 10 year rule. Therefore, in this situation I would recommend that the beneficiary should make up the missed RMDs and file Form 5329 to request the penalty waiver.
The final Secure Act Regs do not address the result of no action whatever by the end of the year following the year of death. Qualified plans are probably more likely to contain their own rules regarding the election, and some may also stipulate that the 10 year rule applies.
Permalink Submitted by Rick Herndon on Thu, 2024-09-26 13:21
Thank you.
So correct me if I’m wrong.
If the EDB fails to take the RMD’s for a full ten years and the IRS finally comes back and bills for the missed RMDS, the 5329 waiver would still be available for all of those years, and at most would result in a 10% penalty for all of the missed RMD’s.
So given the fact that this person will be in the 0% tax bracket when they retire and is in the 22% bracket until they retire, it would probably make more sense to do nothing at this time.
Permalink Submitted by Alan - IRA critic on Thu, 2024-09-26 20:39
There is a new SOL for excess accumulations based on Form 1040, rather than Form 5329. It’s 3 years after the tax return for the missed RMD year is filed. For example, if an RMD was due for 2024 and not taken, and the 2024 return is filed in April, 2025, after April, 2028 the IRS can no longer assess a penalty for the 2024 missed RMD. But if the taxpayer does not want to gamble that they can run out the SOL they must take the missed RMD and file the 5329 either to pay the reduced penalty or request the penalty be waived as in the past.
An IRA custodian cannot force out what they think is the RMD and it’s highly unlikely that the IRS will know which beneficiary is an EDB or a 10 year rule beneficiary. However, if there is an audit and the IRS does catch the missed RMDs before the beneficiary self corrects, the penalty will be 25%, not 10% and could include other penalties such as late interest. The IRS has been highly inconsistent regarding these additional penalties. It might also be expected that due to the reduced penalty %, at some point the IRS will levy more penalties and stop accepting total penalty waiver requests with Form 5329.
Given all this, and lack of clarity on defaulting into the 10 year rule, it is impossible to predict whether there will be more clarity in the near future and/or how enforcement evolves.