bene IRA problem- missed stretch and 5yr rule
Hi,
I just inherited a client from another advisor. Looks like they got bad advice from their CPA some years ago and I’m trying to assess their options/damage.
Turns out they have a bene IRA inherited from a parent that died in 2001 (before the required beginning date). The bene converted it to the bene IRA and took a big distribution in 2003 representing 50% of the IRA, but they did not take anything since.
My understanding is that since they failed to begin stretch IRA bene distributions by 12/31 of the year following death, that the are stuck with the 5 year rule. Of course, the deadline for the 5year rule was 12/31/2006, which has passed.
What options, if any does this client have?
Any way to salvage the stretch IRA distributions?I’m fairly certain there is not but thought I’d ask.
What is the penalty for failing to fully distribute the account by the end of the 5th year? Is it a 50% penalty?? Any advice as to getting forgiveness from the IRA based on bad advice from their old CPA?
Any feedback appreciated. Thanks!
Reards,
-Dave
Permalink Submitted by Alan Spross on Wed, 2007-11-21 22:09
Dave,
There may be a partial solution here. When the 2002 RMD rules were announced, a grace period was included allowing a 5 year rule taxpayer to catch up life expectancy distributions by 12/31/03. Certainly, his 2003 distribution would have qualified. Pasted summary to follow:
“In response to those
comments, these final regulations
provide a transition rule that permits
beneficiaries subject to the 5-year rule
under the 1987 proposed regulations to
switch to the life expectancy rule,
provided that all amounts that would
have been required to be distributed
under an application of the life
expectancy rule are distributed by the
earlier of December 31, 2003 or the end
of the 5-year period following the year
of the employee’s death.”
His 2003 distribution should qualify for election of life expectancy, so now we are down to failure to take the 04-06 RMDs. I suggest taking those RMDs now along with 07, and filing the required 5329 forms for each year along with a request to waive the excess accumulation penalty. Include a copy of the distribution statement for the 4 years of distributions showing that all of the later RMDs have been caught up. That will show the IRS good faith that the most recent omissions have been corrected and he should then be able to retain the life expectancy RMD schedule. There is no longer any need to front any penalty dollars with the 5329 forms.
Permalink Submitted by David Briegs on Fri, 2007-11-23 14:19
Very helpful Alan. Thanks!
-Dave