Think I’ve messed up badly…missed RMDs from years ago
Hi all, new to this group but could use some expert advice here.
I am 29 years old — my dad (only parent) died when I was 19, suddenly. I knew nothing about IRAs at the time but he had a few with me as beneficiary. He died 12/28/11. I now have inherited IRAs at two institutions — both are via annuities. These were set up only a few weeks after my dad died and I barely remember signing the paperwork in the frenzy that had been going on in life (family wasn’t very supportive, and possibly counter-productive).
After multiple moves and a new career, I lost track of the IRAs. It was only recently that I learned I needed to be taking RMDs from them all along. The combined amount is currently around $80,000. I am terrified because, after talking to one of the custodians, it seems like they wanted me to have the entire thing emptied out at year 5 (end of 2016). It’s now 2022 — not good.
I went from knowing nothing about IRAs to too much with not enough knowledge of what to actually DO with it. I’ve read about the process of reporting missed RMDs and requesting relief, but I have some questions. I am 100 percent fine with taking the full amount of the IRAs at this point and paying the taxes on it — what scares me is the penalties. Is it true that, assuming the custodian of one of the accounts wanted it cleared by year 5, that my RMD in 2016 would be the full account balance? And thus the penalty would be half that for 2017? And if so, does that mean that I’d also owe that massive penalty for 2018 – 2021? If so, it’s a nightmare that be unbelievably upsetting to my current life trajectory and be well more than the actual amount inherited.
Wondering if there’s anything that can be done to fix this, or do I just beg the IRS to forgive? I’m just waiting for a bit more info from the custodians and then I’m prepared to take the full accounts as a lump sum for 2022.
I asked my accountant some of this stuff, but it’s quite the abnormal scenario, I’m aware — and I’m just terrified that the penalties will be far more than I’d ever inherit (and be financially ruinous!).
Thanks for your wise advice in advance. I know I should have been more on top of this earlier in life, but sadly I can’t fix that part now. Just hoping I can salvage what I can without having to quite literally sell my house to pay RMD penalties…
Permalink Submitted by taxhelp22 on Mon, 2022-04-11 01:44
Dad was 56 when he died, so the five year option is there. Seems that’s what the IRA custodian is telling me is their default (Lincoln Financial annuity, if that helps at all)
Permalink Submitted by Alan - IRA critic on Mon, 2022-04-11 04:24
You would have to check the beneficiary clause of the annuity. While almost all non insurance IRA beneficiary terms default to life expectancy RMDs, this may not be true for your inherited IRA annuity. If the beneficiary provision does not require the 5 year rule, then per IRS PLR 2008 11028, you can restore life expectancy RMDs and continue from there. You might also check your records for Form 5498 or other notification from the companies about an annual RMD, or in 2016 about a lump sum distribution.
You would have to determine the annual life expectancy RMDs for 2012-2019, and for 2021, and request the total amount to be distributed. Because of your age, the annual RMDs would be low, but they would be taxable in 2022 along with the 2022 RMD. You would also need to file a separate 5329 for each of the above years (except 2022) to request that the IRS waive the penalty for reasonable cause, and since you discovered the shortfall before they did, you could count on them approving the penalty waiver.
All of this would be fairly simple if the IRA was not in an annuity. And you are correct about the potential recurring huge penalty if the 5 year rule was required by the annuity contract. But the very size of this penalty makes it all the more likely that the IRS would waive that penalty also, but you would be taxed in a single year for the lump sum RMD distribution, which is itself bad news.
I would not take the lump sum without examining the the written beneficiary clauses of all annuity accounts. They may differ. Since these are not qualified plans, the insurance companies cannot force you to take a lump sum distribution unless their contract says so – and if it does why did they sit on it beyond 2016? Take your time and attempt to discuss this with experienced people. Many reps do not know what they are talking about.
Note that you cannot file a 5329 for a penalty waiver until after your receive the delinquent RMDs. And once you start filling in the 5329 forms, for which there are only 4 lines, read the instructions because completion of those lines is not intuitive. Filling out the form incorrectly is likely your largest exposure regarding paying a penalty.
Permalink Submitted by taxhelp22 on Mon, 2022-04-11 06:36
Appreciate this response. In reviewing the contract for the one annuity I have readily available, it does seem they try to push me into the five year plan per their specifications (if no RMD taken in first year after death). Most definitely intend to delve into it deeper. Good to know that the amount itself may lend the IRS toward being more willing to accept my waiver. Naturally the thought of such a crushing blow had my mind go to all sorts of crazy places, but I’m trying to be proactive rather than reactive here (at least, as much as I can in this situation). two questions:Assuming the worst, any tips for the wording of my request for the waiver? Will be careful on my completion of the forms. Does the IRS tend to be a bit more sympathetic to the situation since I’m coming to them with the shortfall, ready to take action?
Permalink Submitted by taxhelp22 on Mon, 2022-04-11 06:42
apologies for double post, excited to find people willing to discuss this. In the above situation, would the 2020 RMD exemption from CARES act apply? or would that year RMD just carry over as well?One final one…which I think I know the answer to. The other IRA annuity has me as the beneficiary of my dad’s mother, who died in 2010 at age 77. I think I know the answe to this, but as long as this IRA went straight to me as an inherited IRA from her, there’s no 5 year rule applicability in this case given her age, right? Would just be over my life expectancy, making up for shortfalls