Inherited ROTH (non-spouse) NO RMDs or closing after 5 years

Submitted by Cindy Michelson on Wed, 2017-03-22 13:36

I need to find out what to if I didn’t know to take RMD from an inherited non spouse ROTH IRA and I did not know that it needed to be emptied by the end of 5 years after the year following the death of the owner. Both my CFP and my CPA said they had no knowledge of these rules since it was a Roth. It was suggested that we go back, pull out each RMD (which I did) and then close the Roth (which I did) and move the money to my regular investment account (which I did) since I could not put the money into a retirement vehicle. I was reading something similar from JTZMPZ@ aol.com from 6/4/16 on your website. *** What should I do regarding penalties and/or asking for forgiveness? What do I need to do for my taxes?



Submitted by Alan - IRA critic on Wed, 2017-03-22 16:21

  • The rules are no different than for an inherited TIRA. The 5 year rule is only required if you were not named as beneficiary on the IRA account because the estate was the actual beneficiary. You could have taken the proper life expectancy RMDs out for each year and requested a penalty waiver on Form 5329 for each year. Now that you have closed the account, you cannot roll back any of your distribution.
  • If life expectancy RMDs would have been allowed, you would need to file a 5329 for each year. Check the last page of the 5329 Inst. for how to fill out each of the 4 lines, because they are not intuitive. Another option is to fill out a 5329 only for the 5th year after the death of the owner assuming you elected the 5 year rule. Use the value of the inherited account at the time of that year in order to determine what you should have withdrawn. The problem with this approach is that the IRS has not issued guidance on what to do for years after the 5th year when additional gains might have been generated in the Roth.
  • The IRS will probably waive the penalty because you self reported the omissions. Send a copy of the account total distribution statement to show that you acted once you realized you should have taken RMDs even though the account was a Roth IRA.

Submitted by Cindy Michelson on Thu, 2017-03-23 13:32

A few additional questions:Will my acountant have to do a 1040X for each year we do the 5329?  If so, should the same explanation letter and request for a waiver of penalty for RC be submitted with each 5329? We did not do a distribution for 2009 since no RMD was required.  We withdrew RMD on separate checks based on the year end balance in the account for 2010 through 2015 (6 checks).  The account was closed before Dec 31, 2016.  Should an RMD from 2016 be recorded on my 2016 taxes if the account balance was “0” at yaer end?

Submitted by Alan - IRA critic on Thu, 2017-03-23 16:13

The 5329 Inst. are ambiguous regarding the need for a 1040X. In most cases the IRS will accept the 5329 by itself but every so often an examiner will return them and request 1040X forms. You could probably file them by yourself since there are only 4 lines to be completed, as your accountant will probably charge you quite a bit for a 1040X that is functionally unnecessary in this situation. The same explanation should accompany each 5329 unless the reason for missing the RMD changed, but that is not likely. You will have to report the entire distribution on your 2016 return, but since the inherited Roth is qualified, the total distribution is non taxable and goes on line 15a and 0 on 15b. You do not need either an 8606 or a  5329 for 2016. All the 2015 and earlier 5329 forms can be mailed together to your IRS service center. The IRS may or may not send you a notice of acceptance, so if you do not hear anything for 2 years you can consider the waiver requests accepted.

Submitted by Cindy Michelson on Fri, 2017-03-24 02:43

do I have to send in the penalty amount with the 5329s?  (Around $18k I think)if I don’t pay up front and the IRS refuses to waive the penalties will I own the original amount plus additional interest and additional penalties?  I heard it be 5% per month that it is unpaid.  thanks for your help.

Submitted by Alan - IRA critic on Fri, 2017-03-24 03:15

No, do NOT send in the penalty amount you are asking to be waived. The IRS will probably waive it, but if they do not they may or may not bill you for late interest. Nothing like 5% per month.

Submitted by Cindy Michelson on Tue, 2017-03-28 13:17

Should I mail the all 5329s and the RC letters under separate cover from my regular 2016 filing?  Or should it all go together?  I usually e-file my regular returns.

Submitted by Alan - IRA critic on Tue, 2017-03-28 15:32

The 5329 forms for prior years should be mailed together to your IRS service center, but NOT with your 2016 return. You can file 2016 normally. You may want to file the 5329s without the 1040X, but if the IRS kicks them back to you you can always do the 1040X forms then and re submit. Chances are good that the IRS will accept the 5329s the first time.

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