Missed Non-Spouse Inherited IRA 5 Year deadline

Submitted by Andrew Graff on Fri, 2017-03-17 17:11

Well, it looks like we made a big mistake.

My wife’s mother was born on Feb 2, 1942 and passed away on April 7, 2010 (so she was under 70 1/2 yrs when she died.) When the IRA transferred to my wife I was aware that we would need to either take scheduled withdrawals or take everything out within five years. My mistake was I thought the five year clock started the year she would have turned 70 1/2, which would have been approx Aug 2, 2012, leaving us until the end of 2018 to withdraw the funds. Yesterday, I was going to withdraw part of the funds, thinking (like IRA contributions) the withdrawal would go towards 2016 tax year. Well. I learned that was not the case and then, to my horror, further learned my error in calculating the start of the 5 year clock.

-As I understand it:
-The actual deadline would have been Dec. 31, 2016, correct?
-We will liquidate the account immediately, and then need to file a 5329? Any other forms?
-Since we will liquidate in 2017, do I file the 5329 with 2017 return or file it with our 2016 return?

Also, any other advice on requesting leniency on the penalty? Uggghhh.

Thanks so much in advance!
Andy



Submitted by Alan - IRA critic on Fri, 2017-03-17 17:34

  • Under the 5 year rule, the inherited IRA had to be drained by 12/31/2015. If you drain it now, you would probably file a 2015 5329 and request waiver of the 50% excise tax. Since you are self reporting this, if you make a logical statement of “reasonable cause” and include a copy of the distribution statement, the IRS will probably waive the penalty. Of course, the entire account will be taxable in 2017, the year of distribution.
  • There may be a different solution if you care to pursue it. Under PLR 2008 11028, the IRS allowed the beneficiary to “save the stretch”, which would be taking life expectancy RMDs based on your wife’s age as of 12/31/2011. To do this, you would have to reconstruct what each year’s RMD would have been, but that is easy if you saved the year end statement showing the account balance. You could distribute the 2011-2016 RMDs, which would be far less than the full value (ballpark 20% of the current value), but then could continue life expectancy RMDs for 2017 and beyond. If you do not want to bother with annual RMDs, you can still drain the account anytime she wants, but the above procedure would reduce the tax bill for full distribution now. One bit of extra work would be preparing a 5329 for each year requesting the penalty waiver for being late with the annual RMD. But these are easy to complete, only 4 lines each. Note that whichever way you go, the chance of getting the penalty waived are good because she is self reporting this and making up the late RMDs either way. While in that specific court case, the applicant DID pay the excise taxes for the missed years, I think the chances are good that the IRS would waive them as long as you present an effective 5329 with statement. Your decision here is probably guided by the size of this account and your need for the money now vrs later.

Submitted by Andrew Graff on Fri, 2017-03-17 18:56

Wow, thanks so much! In my brief research over the last day or so, I did not realize that you could start life expenctancy RDMs if you did not do so the first year required. This sounds like a much better avenue for our case.So, just thinking this through from your advice above, we need to: 

  • -Calculate RDM for each year from 2011 to 2016 and file a 5329 for each year.
  • -Take a lump distribution now = total RDMs from 2011-16
  • -File a statment of explanation with the 5329s.     

In the statement accompanying the 5329s, what supporting documentation should we include? End of year account statements, proof of lump distribution, etc? Also, should we reference PLR 2008 11028, or is that policy now? Many thanks again!

Submitted by Alan - IRA critic on Fri, 2017-03-17 18:59

You can use the same narrative on each 5329. But even though they are only 4 lines, what you put on those lines is not intuitive. So read the last page of the 5329 Inst. on how to fill out those 4 lines. Send the forms in together to your IRS center and include a copy of the IRA Distribution statement showing the total withdrawal which equals all the late RMDs. I would not include the 2017 RMD in this distribution, but it needs to be withdrawn separately before year end and will be taxable in 2017 along with the larger make up distribution. No need to reference the PLR. Note that IRA agreements have life expectancy as the default method, not the 5 year rule. You could select the 5 year rule, but it is not the default rule.  https://www.irs.gov/pub/irs-pdf/i5329.pdf

Submitted by Andrew Graff on Fri, 2017-03-17 19:22

Perfect, thank you so much!!

Submitted by Andrew Graff on Fri, 2017-03-17 19:54

OK, sorry, one more quick question…  When calculating RMD, does one just take the Dec 31 balance figure for each year or should we back out what was supposed to have been distributed the year prior? For example:

  • Year 1 actual balance=$50,000 and RMD=$2000
  • Year 2 actual balance=$52,500

Should we calculate Year 2 RMD on $52,500 (actual) or $50,500?

Submitted by Alan - IRA critic on Fri, 2017-03-17 23:08

The IRS does not provide clear guidance on this. In most cases, the actual year end balance is used with no adjustments and it is simpler. Since a penalty waiver is also being requested, your chances are better if you just take out the RMD using the actual prior year end balance, so 52,500 in your example.

Submitted by Andrew Graff on Sat, 2017-03-18 12:56

Excellent, thanks again for your help!

Submitted by Chris Leung on Wed, 2018-10-31 18:50

Hello.  Thank you for all of the information thus far.  I am in the same boat, where I inherited my mother’s IRA 10 years ago , but did not realize I need to withdraw RMDs.  If I follow the above guidance with withdrawing the RMDs that I had missed and file 5329 for each year, is there anything else I will need to do?  Do I need to file amendments to prior year returns as well?

Submitted by Alan - IRA critic on Wed, 2018-10-31 19:59

Nothing else. You do not need to amend prior returns since the 5329 itself is considered a return and you are filing one for each missed year. The make up distributions are reported on a single 1099R and shown as taxable income in the year of the distribution. No 5329 is needed for the year of the total distribution, just the tax return.

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