Inherited IRA RMD not taken on time for stretch?

Submitted by Stephen Cuskley on Fri, 2016-12-30 21:53

I read the following on foxbusiness.com about inherited IRAs:

“Nonspouse beneficiaries can be done in by procrastination. In order to choose the stretch option, a beneficiary must take yearly required minimum distributions, or RMDs, based on his or her own life expectancy.

There is a cutoff date for taking the first RMD.

“You have to take out your first distribution in the next calendar year by Dec. 31 of the calendar year following the year that the decedent died. If you miss that date, you default back to the five-year rule,” says Tully.”

Is it true that “if you miss that date, you default back to the five-year rule”?

What if you had not set up an inherited IRA by Dec. 31 of the following calendar year?

Thanks,
Steve



Submitted by Alan - IRA critic on Sat, 2016-12-31 01:28

  • There may be a cutoff date for qualified plan beneficiary RMDs, but IRA accounts rarely contain specific election deadlines for the 5 year rule, and life expectancy is the default method for virtually all IRA agreements. This was reinforced by IRS PLR 2008-11028 as explained here:  http://www.vendorpedia.com/readArticle.asp?AID=1001034
  • Therefore, unless the IRA agreement clearly states, the beneficiary does not lock in the 5 year rule by missing life expectancy RMDs, unless that beneficiary holds one of the very rare IRA agrements that state as such. It should also be clarified here that the 5 year rule can only be elected or apply when the IRA owner passes prior to the RBD, therefore for deaths post RBD it can never apply.
  • Qualified plan documents are much more likely to include specific options or election provisions with deadlines because such plans need clarity so they can enforce the RMD rules. Conversely, IRA custodians are not subject to any meaningful enforcement of beneficiary RMD rules by the IRS.
  • You will also note that in the PLR the applicant voluntarily paid the 50% penalty for each delinquent lfe expectancy RMD year, but there is considerable anecdotal evidence that the IRS is waiving this penalty for late IRA RMDs where the beneficiary makes up the late RMDs, self reports the omissions on Form 5329 and requests that the penalty be waived for “reasonable cause”.
  • Many IRA agreements include language referring to beneficiary election of the 5 year rule, but NO deadline for making that election. They rely on IRS Reg 1.401(a)(9)-3 regarding the deadline to make the election by incorporating reference to the IRS Regs. But that is to elect the 5 year rule as LE remains the default method. Very few beneficiaries actually make a stated election, rather they generally just miss taking their life expectancy RMDs.
  • Whether the inherited IRA has been established or not is immaterial to this situation.


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