Inherited IRA 5 Year Option
Am I correct in my understanding that I am not eligible for the 5 year option. Account Value 75,000.
My father passed at 85. I am certain he was making annual RMD’s. I have taken a 1 year RMD already. I am experiencing a life event and I am looking for options.
Because my father was well passed 70 and already taking RMD, I am not eligible for the 5 year option correct?
So all l can do is what I call the approx 50% route by taking it all getting taxed and penalized 10%.
Am I correct?
Drew
Permalink Submitted by Alan - IRA critic on Wed, 2014-02-26 00:40
You are not eligible to use the 5 year rule for your RMDs. However, you can distribute any amount larger than your RMD you wish including draining the account. This account is inherited so therefore there will be no 10% penalty either. All you would pay is ordinary income taxes on the amount of your distribution and no penalties of any kind.
Permalink Submitted by Drew Duplicki on Wed, 2014-02-26 01:12
Thank you for responding. It is nice to know this emergency option is available if I need to keep a roof over my head in a few years. Stinks. It was a nice gift from my father. Just curious and don’t want to waste your time but then what is the point of the 5 year option?
Permalink Submitted by Alan - IRA critic on Wed, 2014-02-26 02:01
While an individual could elect the 5 year rule only for deaths before the required beginning date, it would rarely be a benefit compared to life expectancy (stretch) RMDs. The 5 year rule is mainly for non individual beneficiaries such as estates or charities that do not even have life expectancies. If you can you should avoid taking out too much in a single year as that would increase your tax rate. But if you expect to need the full balance, try to take half of it in one year and the rest the following January to save on taxes. The only potential penalty you would face is by failing to take at least your RMD, ie for taking out too little.