Inherited IRA Penalty Amount
I’m having difficulty finding the answer to the following question: A person inherits an IRA, has the funds put into a beneficiary IRA. Two years later (after date of death) still hasn’t taken RMD. The owner understands the entire account must be distributed within five years of year of death. If this distribution isn’t done within 5 years, what is the penalty percentage in year six? Also, is it the custodian’s responsibility to make sure the account is completely distributed at the five year mark? Thank you.
Permalink Submitted by Jose Morales on Mon, 2012-05-14 15:48
Excess Accumulation penalties are covered in Publication 590: http://www.irs.gov/pub/irs-pdf/p590.pdf
The excess accumulation penalty for amounts not withdrawn as required is 50% of what needed to be withdrawn. There is no requirement for an IRA Custodian to monitor this 5 year period on behalf of a beneficiary. It is a beneficiary’s sole responsibility to take their required distributions and know how to calculate them.
Permalink Submitted by Alan Spross on Mon, 2012-05-14 16:12
A designated beneficiary is not necessarily limited to the 5 year rule if they miss the first few life expectancy RMDs. They can make up the missing RMDs and pay the 50% penalty only on the RMDs missed. See the following:
http://www.financial-planning.com/fp_issues/2008_7/saving-stretch-613061…
Permalink Submitted by John Boyle on Mon, 2012-05-14 22:14
Thank you. The example in the link is similar to this person’s situation. The spouse died with an existing 401k in 2010. The advisor helped process the paperwork and had the funds put into a beneficiary IRA rather than have the client assume the account as her own (the advisor is saying she had no other option. I don’t believe he’s correct). To date, no funds have been distributed from IRA. He is advising her to see an attorney. I think she needs to see a good CPA.
Permalink Submitted by Alan Spross on Mon, 2012-05-14 22:34
Perhaps the surviving spouse was under 59.5 and the advisor thought she made need funds before that date?
In any event, she can still assume ownership of the inherited IRA, in fact there is a default rule that indicates that if she was required to take an RMD as beneficairy and did not do so, she is deemed to have assumed ownership. If the decedent would not have reached 70.5 by the end of 2011, she did not have to take an RMD and the account is still inherited.
But if she did have an RMD requirement in 2011, did not take it and therefore now owns the IRA, she should have it retitled as such and then take the missing RMD as owner rather than beneficiary.
As you can see, both decedent’s age at death and surviving spouse’s age should be considered in determining what her next step is.
Permalink Submitted by John Boyle on Mon, 2012-05-14 23:52
Husband was 56 when he died in 2010, she is NOW 55. No RMDs have been taken. Is there any way for the account to be recharacterized to a traditional IRA? Otherwise I think her only option is to pay the 50% penalty on the RMD not taken in 2011. Do you think the IRS would forgive the penalty? By the way, she doesn’t need the money. I think it was just an error to open the bene IRA.
Permalink Submitted by Alan Spross on Tue, 2012-05-15 02:10
FIrst of all, there was NO RMD requirement assuming that she was the sole beneficiary of the IRA. Her first RMD would not be required for another 12 years, the year her husband would have reached 70.5.
The advisor did the right thing. This way, there is no RMD, yet if it turns out she needs funds, they are available to her penalty free prior to her reaching 59.5.
Once she reaches 59.5, she can roll it over to her own IRA then.
Rolling over a spouse’s IRA prior to 59.5 is a frequent mistake, but there is no problem here at all.
Permalink Submitted by John Boyle on Tue, 2012-05-15 14:49
Thank you. That’s why I posted this. I was confused.