Inherited IRA / RMDs missed / 5 years elapsed
My client’s father died on December 27, 2001. My client (the decedent’s son) was the sole designated beneficiary of the IRA. Son was aware that he inherited the IRA and the account was appropriately titled. However, the IRA trustee did not remind the son to take any RMDs from the account, so son was unaware of the RMD requirement.
Son tried to change the IRA trustee in the fall of 2008, and the new trustee began asking questions about why RMDs were not being taken. The old IRA trustee (after realizing the mistakes of the past) calculated an RMD for 2008 and distributed that amount to son before the end of 2008. The IRA has not been moved to the new trustee.
I am thinking that because RMDs were not taken at anytime during the 5 years after the decedent’s date of death, the entire account balance should have been fully withdrawn no later than 12/31/2006. The current value in the IRA is about $90k. The client is inclined to take a full distribution of the IRA, pay income tax on it, and beg for a waiver of the 50% penalty. I would think the only possible way to try to maintain the “stretch” IRA would be to ask for a Private Letter Ruling, which we think would be cost prohibitive given the size of the IRA.
If the entire account is liquidated in January of 2009, would we wait until the client’s 2009 Form 1040 is filed to file the Form 5329 and beg for the waiver of the 50% penalty? That seems like a long ways off and the client would like some closure on this issue.
Any thoughts on this situation would be appreciated.
Permalink Submitted by Alan Spross on Wed, 2009-01-07 05:48
Read the attached first:
http://www.financial-planning.com/asset/article/613061/saving-stretch.html
Note that whether father passed pre or post RBD is material as well as the IRA agreement in force at his death. Also, the 2002 Final RMD Regs were optional for RMD requirements starting in 2002, which would be client’s first RMD year under life expectancy.
If client does not want to pursue any of this to possibly maintain the stretch, he might take the lump sum now and file the 5329 with the 2008 return with a complete explanatory statement requesting waiver of the penalty for reasonable cause and providing a copy of the statement showing total distribution of the account. The IRS will probably be in a forgiving mood in 2009 because of all the RMD confusion past and present.
Unfortuneately, closure vrs a positive outcome may provide a conflict since securing both may not be possible.
Permalink Submitted by Daniel Doiron on Wed, 2009-01-07 10:42
Thanks very much for the link to the article. We had seen this PLR, but Ed’s analysis of it is so good. FYI – in my case, Dad died before his required beginning date. We will obtain the IRA custodial agreement and see if the 5 year rule is required under the agreement. If it is not required, we will likely suggest to the client that a stretch might still be in play as long as we calculate what should have come out for RMDs in 2002 – 2007 and withdraw those, reporting them on 5329s and asking for waiver of the penalty. In that case, I presume we would file 2002 through 2007 5329s as stand alone forms, with the request for the waiver attached to each 5329? Thanks very much.
Permalink Submitted by Alan Spross on Thu, 2009-01-08 00:06
That’s right. 2009 will be a good year to request such a waiver, since the IRS is sensitive to the loss of value in retirement accounts. Hopefully, he has access to all the year end values to figure the amount of each life expectancy RMD.
It is also worthwhile to determine if he inherited any basis with this IRA. If so, distributions would be less than fully taxable on Form 8606. But it may take some digging if father’s old tax records are no longer available.