RMD’s from IRA inherited from a non-spouse

Submitted by Sidney Poretsky on Wed, 2016-08-10 16:44

An individual inherited an IRA in 2011 from a friend, not his spouse. He has not taken any RMD’s claiming he can take the entire account by December 31st of the 5th year after his friend’s death, which would be this year, and not pay any penalty. The account value is $12,000 and held at Vanguard (in a money market mutual fund account), and they have confirmed this. My understanding was that the 1st RMD from a non-spousal IRA’s must come out by December 31st of the year following the year of death, and every year after that. I am not aware of any 5-yr exception, nor could I find one in IRA Publication 590. Can he in fact can avoid the 50% penalty by taking the entire account by the end of the 5th year? I would very much appreciate your comments. Thank you.



Submitted by Alan - IRA critic on Wed, 2016-08-10 18:19

  • ONLY if his friend passed PRIOR to the required beginning date can the individual elect to use the 5 year rule as you described it. Of course, that will result in the entire 12k being taxable this year, and he will have lost the benefit of a longer stretch period. Sounds like he may have understood this for awhile and apparently has planned for it.
  • Note that if the individual is not maxing out his own retirement plan contributions, he could use the 12k distribution to subsidize 401k or similar increased pre tax contributions which would offset the taxable income from the inherited IRA distribution. These would be new contributions since the RMD cannot be rolled over to any plan.
  • From IRS Pub 590 B, p 9: ” 5-year rule. The 5-year rule requires the IRA beneficiaries to withdraw 100% of the IRA by December 31 of the year containing the fifth anniversary of the owner’s death. For example, if the owner died in 2015, the beneficiary would have to fully distribute the plan by December 31, 2020. The beneficiary is allowed, but not required, to take distributions prior to that date. The 5-year rule never applies if the owner died on or after his or her required beginning date.”
  • Under most IRA agreements (but not employer plans), the beneficiary does not have to actively elect the 5 year rule. By simply not taking the life expectancy RMDs the beneficiary is considered to have elected the 5 year rule.

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