Missed 5-year rule – what is the penalty?
Hello:
I’m concerned that new client will not get it together in time
to adhere to 5-year rule for an IRA distribution.
Spouse died in 2003 at age 65. No beneficiary was named for IRA and
distribution will default to estate per custodian. If she does miss 12/31/08
deadline, how is the penalty calculated? I’d like to make her aware
of the consequences.
Many Thanks.
Charles
Permalink Submitted by Jose Morales on Mon, 2008-12-01 23:00
Were they residents of a community property state? I would imagine that even if the IRA owner did not name a beneficiary that in a community property state she would be the rightful beneficiary regardless. Check your state laws regarding this issue, as it could provide her with an “out” in regards to this situation. She would then be able to take the IRA in her own name and not worry about mandatory distributions until she herself turns 70 1/2.
Permalink Submitted by Chip Simon on Mon, 2008-12-01 23:09
No, it’s New York.
I have post-mortem planning steps readied to achieve the spousal rollover.
However, if she doesn’t hit the 5-year distribution rule, a large amount may be lost to penalties or the post-mortem strategies may no longer apply.
That why I want to makes sure she understands the consequences and the need to proceed and execute the distribution to the estate.
Thanks for any additional info.
Charles
Permalink Submitted by Alan Spross on Mon, 2008-12-01 23:16
Charles,
The penalty is 50% of the entire remaining account. This penalty can often be waived using Form 5329 and the reasonable cause appeal per the Inst. for 5329, p 6.
See att’d link to an article by Bruce Steiner that remains true with respect to the spousal rollover. Bruce is domiciled in NYS. Note that any spousal rollover must be done within 60 days of distribution to the estate. Probably too late to terminate the estate and assign the IRA.
http://www.kkwc.com/docs/AR20050125164755.pdf