Question on 5-Year Rule
I asked a question before, but am hoping someone can answer this. IRA owner already began RMD’s. Died earlier this year with two minors as beneficiaries. I see in everything I read that if RMD’s have already begun then you use the life expectancy of the individual beneficiary (as long as split prior to the end of year following death). I don’t see that you are allowed to apply the 5 year rule. Basically, the parent’s of the minors want to wait 5 years until they are adults before they receive a distribution. Can they do this…or do the minors need to start taking distributions over their lives now because RMD’s had already started for the IRA owner.
Thank you!!!!
Permalink Submitted by Jose Morales on Mon, 2008-09-22 20:33
Since the IRA owner died after the Required Beginning Date (an assumption from the statement that they began taking MRDs) distributions must continue each year. If they do not take a distribution and excess accumulation penalty of 50% will be owed to the IRS for each year an MRD is not taken.
Permalink Submitted by Christopher Smith on Mon, 2008-09-22 21:36
Are you sure they don’t have the option of the 5-year rule even though the RBD began for the IRA owner. I guess it just doesn’t make sense why the IRS wouldn’t allow a beneciary in this case to wait 5 years and then have to receive the entire amount if that is what they wished to do. The IRS would receive their taxable interest faster than if it was stretched out. I guess a lot of things don’t make sense.
It would be nice to hear other people’s opinions or specific cites. BTW – I agree with you that the 5 year rule doesn’t apply in this situation, I just haven’t seen any reason why that is the case.
Permalink Submitted by Jose Morales on Mon, 2008-09-22 22:38
Have you tried reading IRS Publication 590?
[url=http://www.irs.gov/publications/p590/ch01.html#d0e3324%5DWhat if you inherit an IRA?[/url]
[url=http://www.irs.gov/publications/p590/ch01.html#d0e6046%5DWhen Must You Withdraw Assets[/url]
If you would like another opinion you may call the IRS taxpayer hotline, 1-800-829-1040
Permalink Submitted by Jose Morales on Mon, 2008-09-22 22:48
Also, there is nothing stopping a beneficiary from taking more than the RMD. It is a “Required MINIMUM Distribution.” If the beneficiary wants to close the IRA out in 5 years that is perfectly acceptable, as long as they fulfill their RMD each year leading up to the year in which they close the account.
Permalink Submitted by Alan Spross on Tue, 2008-09-23 00:03
I am attaching a copy of the applicable IRS Regulation on this, but the Regulation is not going to explain why or how it came to be such:
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Q–5. For required minimum distributions after an employee’s death, what is the applicable distribution period?
A–5. (a) Death on or after the employee’s required beginning date. If an employee dies after distribution has begun as determined under A–6 of §1.401(a)(9)–2 (generally on or after the employee’s required beginning date), in order to satisfy section 401(a)(9)(B)(i), the applicable distribution period for distribution calendar years after the distribution calendar year containing the employee’s date of death is either—
(1) If the employee has a designated beneficiary as of the date determined under A–4 of §1.401(a)(9)–4, the longer of—
(i) The remaining life expectancy of the employee’s designated beneficiary determined in accordance with paragraph (c)(1) or (2) of this A–5; and
(ii) The remaining life expectancy of the employee determined in accordance with paragraph (c)(3) of this A–5; or
(2) If the employee does not have a designated beneficiary as of the date determined under A–4 of §1.401(a)(9)–4, the remaining life expectancy of the employee determined in accordance with paragraph (c)(3) of this A–5.
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I would speculate that the Regs reflect a desire to continue distributions once they have already begun by virtue of the owner reaching their RBD. If they have not begun , then the 5 year rule becomes an option.
Why to those parents NOT want to take RMDs when such RMD will be a very small portion of the account? Does this relate to the requirement in the applicable state to appoint a guardian or establish an UTMA?