Inherited IRA?
I have a client who passed away last month (Nov 2011) while still working. She was a teacher in the Ohio State Teachers Retirement System (STRS). She was 75 and still working and therefore had not yet starting taking RMD’s. My question is when does a non-spouse beneficiary (son) have to take the RMD and what value is the calculation made from? The plan is to roll the funds over to an inherited IRA and have the son start taking RMD’s based on her life expectency. Is it her age at death that we will use for the RMD calcualtion?
Permalink Submitted by Alan Spross on Mon, 2011-12-19 18:09
Technically, the son should take her 2011 RMD before the end of this year, as she apparently did not take any distributions this year and her death this year made 2011 into an RMD distribution year based on the plan balance on 12/31/2010. If the son does the transfer this year, the plan should hold the RMD out of the transferred amount and send the RMD to him. It will be taxable to him. If it is too late to get this done in 2011, the son can add a Form 5329 to his return requesting the IRS to waive the penalty. This is routine for late year deaths where the decedent had not completed the RMD and the beneficiary ran out of time.
If the transfer to an inherited IRA is done in 2012, the plan should take both the 2011 and 2012 RMDs out of the transfer. Starting in 2012, the RMD is based on the son’s life expectancy, not the client’s. His age would be the age he will attain in 2012, the year following death. He would not take an RMD from the IRA until the year following the year the inherited IRA was funded.
A non spouse beneficiary also has the option to convert all or part to an inherited Roth IRA. While RMDs will still be due from an inherited Roth, this is an option to consider because once the funds are transferred to an inherited TIRA he can no longer convert any of that amount.
If there are annuity options for him instead of a lump sum, that may also be an option for him to consider.
Permalink Submitted by Rick Briner on Mon, 2011-12-19 20:50
I appreciate the information. I was under the assumption that there would be no RMD for 2011 because she died before her required beginning date which would not have been until she retired. Does that not play into this situation?
Permalink Submitted by Alan Spross on Mon, 2011-12-19 23:39
Sorry, you are absolutely correct. I overlooked the “still working” statement that was very clear, and death before the RBD means no RMD requirement for 2011.
Since she passed prior to the RBD, the RMD treatment options potentially expand for 2012. You would expect a state plan to now conform to the default life expectancy RMD rules, but it is possible that the plan still contains the 5 year rule under which he could transfer the entire amount in 2012. But in most cases he would want to use his own life expectancy for RMDs from the inherited IRA. He should ask the plan to hold out his 2012 RMD IF he does not get the transfer done this year. The reason for that is that if the plan still has the 5 year rule in place or an option to elect the 5 year rule, they might transfer the entire balance in 2012 and the actual 2012 RMD would amount to an excess contribution to the inherited IRA. If that happened it is not costly to fix but can be a pain to report properly on Form 1040 and the IRS might get confused. To avoid that issue, he should ask for the 2012 RMD to be distributed to him separately from the direct rollover to the inherited IRA.
It is vital to get the transfer done before the end of 2012, just in case the plan still has the 5 year rule. If the transfer does not get done by the end of 2012, he would be stuck with the 5 year rule even for the inherited IRA per Notice 2007-7.
Permalink Submitted by Rick Briner on Tue, 2011-12-20 23:27
Thank you much for the correction and further comments. It was very helpful!