My client received an inherited IRA from his Aunt. The IRA is in Aunt’s name with him as beneficiary. She passed away in 11/2003 at the age of 66. My client is currently age 67. He was told at her death that he didn’t have to take a distribution or didn’t have to take a distribution within 5 years of her death. I think he was given incorrect information. Please clarify
The final regualations on retirement plan distributions became final as of January 1, 2003. Previous to those regulations, the default method of taking a retirement distribution was the five-year rule. That means the account was supposed to be emptied by December 31 of the year that contains the five year anniversary of the IRA owners death. In this case, that would have been 12/31/2008 using the five-year rule.
As of 1/1/2003 – life expectancy became the default; required minimum distributions were to be withdrawn based on the life expectancy of the beneficiary – starting with their age in the year after the death. If the person was 62 in 2004, the life expectancy was 23.5 and the 12/31/2003 balance of the IRA would be divided by 23.5 for the 2004 distribution. However, each IRA could adopt its own rule. Some of them stuck with the five-year rule instead of shifting to life expectancy.
In any case, the IRA should have been totally withdrawn by 12/31/08. Because that didn’t happen, he is potentially liable for a 50% penalty on the 12/31/2008 balance plus a 50% penalty on the 12/31/09 balance. I think he should withdraw the entire balance and request that the IRS waive the penalties.
The advice that he received isn’t totally wrong. He could avoid withdrawals for five years as long as he removed everything by 12/31/2008.
Permalink Submitted by Mel Langer on Wed, 2010-03-31 16:31
Back in 2003, a non spouse beneficiary had to either take the money immediately in a lump sum, or over a 5 year period.
In 2006 the law changed, allowing a non spouse beneficiary to stretch payments over their life expectancy, with distributions being taken immediately, or by 12/31 of the year following the death of the original IRA owner.
In order to take advantage of this “stretch”, the IRA account had to be re-titled, e.g. “John Jones deceased, inherited IRA for the benefit of Jim Jones”.
You better check with the IRS, because someone didn’t do what they were supposed to back in 2003. Whether you can now retroactivaly take advantage of the 2006 Congress ruling, is something I wouldn’t venture a guess on.