RMD when inheriting a beneficiary IRA

Submitted by Paul Rogers on Thu, 2011-04-21 13:12

My client, ‘Pete’, had two aunts who were sisters…neither had children. We’ll call them Agnes and Ruth. In 2007, at age 85, Agnes died and left her IRA to her sister Ruth. Agnes had taken her 2007 RMD. In 2008, Ruth took her RMD from her correctly-titled beneficiary IRA using her age-83 factor of 8.6 from Table 1. Ruth died later that year and had named her nephew Pete as her successor beneficiary.

Here’s what I think: Pete (age 61) would have had to take his first RMD in 2009, using an RMD factor of 7.6, but that was the year that RMD’s were waived due to the financial crisis. For 2010, I told Pete I believe he needed to take an RMD using the 12/31/2009 value and an RMD factor of 6.6 (Ruth’s remaining life expectancy). This would have resulted in an RMD of roughly $7,000. I also said “verify this with your CPA, [i]and make sure you tell him that Ruth inherited this IRA from her sister and that [/i][i]you are a non-spouse beneficiary’s beneficiary[/i].”

I just learned that the CPA told Pete that he can use his own RMD factor of 24.4 or the 5-year rule, (which I expressly told Pete I believed he could NOT do). Pete took out about $2,000 in 2010, and I believe he has an underdistribution amount of about $5,000 for 2010. I’m right, right? Pub 590 does not have an actual example of RMD’s when you inherit a beneficiary IRA…anybody know where I can find one to show the CPA?



Submitted by Robert Wright on Thu, 2011-04-21 14:01

Paul,
According to Natalie Choate you are correct.
Her 6th edition 2006 book explains this on page 75; 1.15.14

She says:

“When the ADP is based on the life expectancy of the Designated Beneficiary (Ruth, in your case), the subsequent death of the Designated Beneficiary prior to the end of the ADP generally has no effect on MRDs. The ADP is established irrevocably once the Designated Beneficiary is determined. Any subsequent beneficiary is merely a “successor” to the original beneficiary’s interest and is ignored in determining the ADP. Distributions must continue to be made over the remaining life expectancy of the now-deceased Designated Beneficiary (or at any faster rate required by the plan or desired by the successor beneficiary). Reg 1.401(a)(9)-5, A-7(c)(2)”



Submitted by Robert Wright on Thu, 2011-04-21 14:05

Paul,
[b]ADP[/b] is Applicable Distribution Period. This is the term used in the book for the life expectancy factor.



Submitted by Paul Rogers on Thu, 2011-04-21 14:30

Thanks, Robert! There’s no chance that these rules have changed in the last five years, is there?



Submitted by Robert Wright on Thu, 2011-04-21 14:41

I’m not aware of a change – but I would want a qualified expert to give you a definitive answer.

The new edition of Ms. Choate’s book, Life and Death Planning for Retirement Benefits, 7th Edition, 2011, can be found here: http://www.ataxplan.com/index.cfm



Submitted by Jose Morales on Thu, 2011-04-21 16:07

Hello Paul, you are correct regarding how this person’s RMD should have been calculated in 2010 and beyond. Unfortunately in these situations it’s very easy for the details to not be full explained or explored by those involved and results in what occurred between this person and their CPA.



Submitted by Paul Rogers on Thu, 2011-04-21 19:53

Here’s the sad part….I explained the non-spouse bene rules to my client in 2009 and asked him to verify them with his CPA. No RMD in 2009, of course, but then when 2010 rolled around, I reminded my client that he had to take his RMD…he was confused by it all and asked me to call his CPA. I called the CPA in early 2010, explained my understanding that a non-spouse beneficiary’s beneficiary must continue using the initial beneficiary’s remaining life expectancy from Table 1 -subtracting one from that each year and not recalculating- for our client’s RMD purposes. I thought it was all set until yesterday, when I was doing some income planning with my client and started the calculation of what he’d need to take in 2011 from the bene IRA. That’s when he said “it’s not much…only a couple thousand”.

I left a voicemail for the CPA who, predictably, is on a beach somewhere. I wonder if the IRS will give my client a pass this one time and simply tell him to get the other $5,000 out immediately. We’ll see.



Submitted by Alan Spross on Thu, 2011-04-21 20:18

Good chance he can get a waiver from the IRS. Follow the Instructions on p 6 of the 5329 Inst. and use best possible “reasonable cause” for the error. Confusion over the 2009 waiver will probably work. Have the other 5k distributed right away and it can help to send the distribution statements for the 5k distribution to the IRS with the request to waive the penalty.



Submitted by Erick Frey on Thu, 2011-04-21 20:55

As stated you are right in your reasoning. Oddly enough a similar situation however the original beneficiary died prior to taking his 2010 distribution. I believe you will see more situations regarding successor beneficiaries on inherited IRA’s as the population of original 401k owners is getting older and we are seeing more and more second generation account holders passing.



Submitted by Bruce Steiner on Thu, 2011-04-21 23:29

It should happen 50% of the time, since 50% of beneficiaries should die before life expectancy.

I think the lawyer handling the deceased beneficiary’s estate should tell the subsequent beneficiaries what they have to do.



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