Beneficiary IRA- never took RMD- advice?
Hi there- I am looking for some help to sort out this situation. I recently spoke with a financial adviser who suggested I liquidate the account, take the tax hit and have a percentage witheld (best time now as I am a student in a low tax bracket), report the money as income on my taxes, then reinvest the money over time into my own Roth. Here is the info:
1. I am the beneficiary for an IRA under my father who died in 1999 at the age of 55.
2. I was 13 when he died, I am 24 now.
3. I have never taken RMD from the account as we’ve never had any guidance as to how to manage the account. The firm it is with has been unresponsive. As a 13 year old I obviously had no clue what I needed to do to get the account in order, so that’s that.
4. I have taken some money from the IRA to pay for school/tuition expenses in 2004-2005.
Has anyone ever come across a similar situation in which the IRA beneficiary did not manage the account on time? What is the suggested course of action? Right now we are considering the adviser’s advice above.
Thank you very much,
Amber
Permalink Submitted by Anonymous (not verified) on Sat, 2010-07-24 18:28
I think what your tax advisor wants to do is liquidate the account before the IRS discovers that you missed 2000, 2001, 2002, 2003, 2006, 2007, 2008 RMDs under the Life Expectancy Rule. The penalty would be 50% of the shortfall each year. Ofcourse the other choice you had was to liquidate the account within 5 years of death, but that did not happen (same 50% penalty on the whole amount!).
The honest thing would be to make up the missed RMDs by calculating each missed year and taking the distributions ASAP. At the same time ask for a waiver of the penalty using IRS Form 5329 and hope the IRS excuses it. Then you can continue to apply the LE rule and take your RMD each year or take the whole amount at anytime.
Also, the amounts you take can be used for Roth contributions, but you actually need to have earned income. The RMD is not earned income.
I guess the value of the Inherited IRA would probably drive the decision too, but you did not give a range.
pko