Long overdue RMD’s on inherited IRA

Submitted by Frank Smith on Wed, 2015-11-18 00:15

Spousal beneficiary of an inherited IRA for which the original owner died in 2002. No RMD’s have been taken since the original owner died (a long time). So, the question is what to do from a tax perspective now. As another point, the total value of the IRA is only $1,800. This is an insignificant amount in the total net worth of the spousal beneficiary. As a result, the spousal beneficiary is much more interested in simply disposing of the IRA in an effective manner as opposed to maximizing income on the IRA distributions. Is there an easy way to simply take the $1,800 as a distribution and pay appropriate penalties without having to file paperwork for missed RMD’s from 2002 to 2015? Is there any other way to simply be rid of the IRA? Thanks.



Submitted by Alan - IRA critic on Wed, 2015-11-18 00:41

What were the ages of each spouse at end of 2002?  Was spouse the sole beneficiary?



Submitted by Frank Smith on Wed, 2015-11-18 23:26

  I must apologize.  The beneficiary was not a spouse.  The beneficiary was a sister (non-spousal).  So, the questions are the same but wherever spousal beneficiary is noted, it should read non-spousal.  Any replies would be appreciated.  Thank you.



Submitted by Alan - IRA critic on Thu, 2015-11-19 00:09

  • Certainly, in this situation and such a small IRA balance, it makes sense to simply take a lump sum distribution, and even more so if the sister passed prior her RBD. The 5 year rule may have applied under the IRA agreement as the default back in 2002. If sister passed prior to RBD, beneficiary could file a 5329 for 2007 only, requesting the penalty be waived since 2007 was the year the 5 year rule would have called for complete distribution.
  • If sister passed after the RBD, then life expectancy would be the default, but filing a 5329 for each year except 2009 would be very time consuming since it would require re construction of the account balance for each calculation. Before exploring the more complex options for death after RBD, please advise sister’s age in 2002 so we know whether we can use the 5 year rule or must address life expectancy RMD shortfall for multiple years.


Submitted by Frank Smith on Thu, 2015-11-19 01:18

  The sister’s age in 2002 was 49 years old.  Thanks.



Submitted by Alan - IRA critic on Thu, 2015-11-19 02:06

Ok – to be clear I assume that was the decedent’s age. Since she passed prior to the RBD and the 5 year rule would have required complete distribution by the end of 2007, filing only one 5329 for 2007 based on the year end 2007 value will be much easier and worth the effort. Filing the 5329 also starts the statute of limitations running so after 4 years the beneficiary will have the peace of mind that the IRS can no longer bill the 50% excess accumulation penalty. With the 5329 form, evidence of the full distribution should be included and the IRS usually waives the penalty in cases of self reporting and immediate action once the taxpayer discovers the error. The IRS will probably only contact taxpayer if they decline to waive the penalty.



Submitted by Frank Smith on Thu, 2015-11-19 19:01

Thanks for the reply.  I guess I am a bit confused as to the mechanics of filing a 5329 for the year 2007 in this case.  There appears to be only a section of the form that could be related to this situation, Additional Tax on Excess Accumulation in Qualified Retirement Plans, but this section looks to more related to calculating payments for not taking sufficient required minimum distribution.  How would you claim the distribution of the 2007 year end value of account which would be $1600 in this case.  Also, if the non-spouse beneficiary takes the full distribution this year it would be $1800.  So, it appears that the extra $200 is not taxed.  Or, is the year 2007 5329 filed with the year 2015 tax return and full income of $1800 reported for year 2015.  Still, there is confusion as to to how to report the $1800 on the 5329.  Any help is appreciated.



Submitted by Jose Morales on Thu, 2015-11-19 21:04

They are not claiming the distribution for 2007, as you cannot take a distribution for that year any longer.  They do owe a penalty for 2007 however, and the 5329 can be filed as a stand alone tax form.  The distribution taken now will be part of this years gross income.



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