non spouse beneficiary “5-year” payout rule

Submitted by ShipsnGiggles on Thu, 2014-05-15 19:52

Hello

It’s been a challenge to find the answer to what I thought would be an simple question. Once again, I am relying on this boards knowledge for guidance….

Thank you in advance

FACTS
Mom passed away in 2007
inherited IRA established in the name of the daughter
Daughter has not (to date) taken any withdrawals

Daughter should have liquidated the entire account no later than 12/31/2013 (i.e. 5 years post death plus 2009 due to RMDs being repealed).

Question:
What is the tax consequence(s) of a non-spouse beneficiary not taking a full distribution 5-years post death?



Submitted by Alan - IRA critic on Thu, 2014-05-15 20:20

  • Potential 50% penalty on the entire balance on 12/31/2013. But since life expectancy is probably the default method in the IRA agreement, daughter could reconstruct the life expectancy RMDs for 2008, 2010-2013 and distribute them and pay the penalty only on the total distributed which would be far less than the total value.
  • But I would be even more aggressive than that. Daughter should reconstruct and take out those 5 RMDs right away (all taxable in 2014), but instead of paying any penaltlies she could file a 5329 for each year and request a penalty waiver for reasonable cause (make up best possible reason for the delinquency). Good chance there will be no penalty and daughter will have restored the life time stretch. Self reported and corrected errors by the taxpayer usually results in the waiver being approved, but the IRS will not send a letter, they will just never ask for the penalty payment.

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