Failure to take RMD’s on inherited IRA
I searched to Forum but didn’t find a direct answer to my situation.
I have a client who inherited a $33k IRA from her father and recently asked me to establish a beneficiary IRA. He died in 2008 and was over 70 1/2. There were 4 beneficiaries on the IRA including the deceased’s spouse and 3 children. I’m still trying piece together the facts, but it appears the original IRA wasn’t divided into separate accounts until February 2011 and that no RMD’s have been taken by anyone since 2008.
I’m trying to offer my client guidance on how to correct this situation. A few questions I have:
1. What if no RMD was taken by the decendent in the year of death? How would the current tax/penalty be calculated in 2011?
2. Would any of the beneficiaries be responsible for a 2009 RMD since RMD’s were suspended that year?
3. Since the IRA wasn’t divided before 12/31 of the year following the date of death, the life expectance of the oldest beneficiary (the spouse) must be used for all beneficiaries – correct?
4. Would any distributions taken by any beneficiary apply toward the RMD in the year the distribution was taken?
5. Does the 5 years distribution rule apply in this situation? In other words, can my client ignore annual RMD’s so long as she takes a full distribution before 12/31/2013.
Thanks
Permalink Submitted by Alan Spross on Mon, 2011-10-03 17:08
1. What if no RMD was taken by the decendent in the year of death? How would the current tax/penalty be calculated in 2011?
The decedent’s 2008 RMD is the joint responsibility of the beneficiaries. While any beneficiary that wants to take out more than their pro rated share can do so, all of them should file a 2008 5329 requesting that the IRS waive the penalty for “reasonable cause”. They should also show evidence of the distribution of their share from their current separate account, with breakdown of how much was for each year.
2. Would any of the beneficiaries be responsible for a 2009 RMD since RMD’s were suspended that year?
No 2009 RMD
3. Since the IRA wasn’t divided before 12/31 of the year following the date of death, the life expectance of the oldest beneficiary (the spouse) must be used for all beneficiaries – correct?
Correct. If surviving spouse assumes ownership of their share it will reduce that RMD only.
4. Would any distributions taken by any beneficiary apply toward the RMD in the year the distribution was taken?
Yes. Additional amount over the current RMD could be included with the 5329 with waiver request for a prior year RMD delinquency. A 2010 5329 will also be needed in addition to the 2008 5329 to request the waiver of the penalty for 2010 RMDs. 2008 and 2010 5329 forms should be sent in together with documentation of the back amounts having been taken. The 2010 RMDs must be the exact amount required for each beneficiary as opposed to the year of death RMD which can be taken by any of them in any combination.
5. Does the 5 years distribution rule apply in this situation? In other words, can my client ignore annual RMD’s so long as she takes a full distribution before 12/31/2013.
No, the 5 year rule cannot apply when the decedent passed on or after the required beginning date. The RBD is 4/1 of the year following the year decedent reaches 70.5. If decedent passed prior to that date, the 5 year rule could apply and the 2008 RMD would disappear.
Permalink Submitted by Michael Curtiss on Mon, 2011-10-03 17:25
Thanks for the quick reply. One last question – does the delinquency penalty compound for each year it goes unpaid, i.e. if the 2008 RMD wasn’t taken, is there a separate penalty for 2008, 2009 and 2010?
Permalink Submitted by Alan Spross on Mon, 2011-10-03 17:40
No, the excess accumulation penalty of 50% of the required RMD is only applied for the RMD year, but if the IRS does not accept the waiver request, they may also charge interest on the late payment of the penalty for 2008 and 2010.
If the waiver request is approved, then the RMDs will be taxable in the year distributed (2011) and no interest charge will be added. Note that the year ending balances must be used exactly as they were for calculating each year’s RMD, they cannot be adjusted downward for the amount of the RMD that was not taken in prior years.
Confusion over the RMD waiver in 2009 could be used as a reason for the problem, unless there are better health related issues. If there are health related issues, it is possible that one beneficiary could get relief where another might not, but the IRS has generally been very lenient with those who act to make up the shortfalls as soon as they discover the oversight and then bring the RMDs up to date.
See p 6 of the Inst for Form 5329 for the mechanics of requesting the waiver.