Non-Spouse inheritance 2005
If a non-spouse inherits money prior to the PPA 2006 (2005), and the participant passed before their RBD.. Are they automatically subject to the 5 year rule? I am much less familiar with the pre 06 PPA rules.. I was hoping they could do a direct transfer into another vehicle but I just found out the inherited the money in 2005.
-J
Permalink Submitted by Alan Spross on Mon, 2009-09-14 21:26
Should be a simple answer, but like most of this stuff, it isn’t.
Notice 2007-7 indicated that a direct transfer for a non spouse beneficiary was optional for a QRP, when Congress apparently expected it would be mandatory. The IRS waffled back and forth, but officially the transfer remained optional until WRERA made it a requirement for plan years starting after 12/31/09. For some beneficiaries, it means that come January, they can insist on the direct transfer if they have been denied before. However, there STILL is a big problem with the stretch because Notice 2007-7 also indicates that if the transfer is not completed before the end of the year following the year owner died, the RMD for the inherited IRA would have to be that of the QRP. And I do not know of any procedure established under which an IRA custodian or beneficiary can easily collect this information from the QRP. Therefore, for most employee death prior to 2006 and the RBD, the 5 year rule technically will apply, but 2009 does not count as a year due to the RMD waiver. Effectively, the 5 year rule becomes a 6 year rule when 2009 is one of the years.
Inherited non spouse IRAs can also be effected by the agreement, but are much less likely to have a restrictive agreement. Starting in 2002, the default method allowed by the IRS was life expectancy for designated beneficiaries. However, IRA custodians as well as QRPs were not REQUIRED to change their documents. The vast majority of IRA custodians did change fairly quickly, but it is still possible that there are a few IRA custodians around that still use an agreement that requires the 5 year rule for deaths prior to the RBD.
Last year, the IRS released PLR 2008 11028, which allowed a taxpayer who failed to commence lifetime distributions promptly to rescue themselves from the 5 year rule by making up the prior life expectancy RMDs AND paying the 50% excess accumulation penalty for each year. But the ruling also specified that this only applied to IRA agreements that had adopted the default IRS rules. If the IRA agreement required the 5 year rule, then there was no relief allowed.
Permalink Submitted by Joseph Arsenault on Mon, 2009-09-14 21:34
Interesting, so if the inherited assets currently sit in an inherited IRA, and the decedent passed in 2005, the RMD method would either be their own life expectancy or the 5-year rule, depending on the IRA agreement..
I guess another question would be..
If they are able to perform a direct transfer from one IRA to another, and maintain it as an inherited IRA, are they still subject to the original agreement?
Permalink Submitted by Alan Spross on Mon, 2009-09-14 22:45
Good question.
No, a TT transfer to an IRA custodian would allow the beneficiary to utilize the new agreement for RMDs. I think that there are very few IRA custodians left with these restrictive agreements, as they would be losing assets and get some real bad PR. But if there were one, I think a transfer to a new custodian would solve the problem.
The PLR cited previously really only contemplated the rather common situation where a beneficiary does nothing, no RMD, no change of custodian and may not even be aware of the account. Here is a link to Ed’s article on that situation:
http://www.financial-planning.com/fp_issues/2008_7/saving-stretch613061-…
The article does not address the affect of a transfer, but if you discovered one of these, the best move would be to transfer the account and then make up the lifetime RMDs. In fact, I see no harm in even requesting relief from the 50% accumulation penalty for “reasonable cause”. Good chance the IRS would grant relief for any reasonably good excuse for not taking RMDs earlier if the request included documentation of having made up the past RMDs. Can’t hurt to ask.