Inherited Roth non-spouse several years ago - no RMDs taken

Submitted by Jon Halvorson on Thu, 2018-08-09 11:20

Hi
Prospect was shocked to hear they missed 8 years of RMDs, as it was a $100k qualified Roth of her dad’ s. Now what? Form 5329 seems wrong- no taxes due, only penalties. I hope to have her take the 8 years now and show the IRS proof, along with copy of new annual RMD request. Is 5329 needed too? Advice pls- what a disaster.

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Permalink Submitted by Alan - IRA critic on Thu, 2018-08-09 16:21

Probably a common error since many people do not realize that non spouse inherited Roths are subject to RMDs. If all the late RMDs are taken out now as they should be, the distribution will be tax free because the Roth is qualified. However, a 5329 must be filed for each year, evidently starting with 2010. 2009 RMDs were waived if that year is included in the shortfall. Since this is a self reported error and will be corrected before filing the 5329 forms, the IRS is likely to waive the penalty even when the “reasonable cause” explanation with each 5329 simply states the beneficiary was not aware that inherited Roths are subject to RMDs. Of course, the value at the end of each will have to be determined in order to know the amount of the RMD and the penalty that would have applied. For 2018, Form 8606 is not needed to report the distribution since the Roth is qualified. The total amount distributed goes on the new 1040 line that replaces former line 15a.

Permalink Submitted by Jon Halvorson on Thu, 2018-08-09 20:14

Thanks! Does it make sense to fully liquidate now? Or: I wonder if “missed annual RMDs” is better to ask for mercy tha “missed five year full liquidation“—-thereby necessitating doing lifetime from now on? Thx

Permalink Submitted by Alan - IRA critic on Fri, 2018-08-10 02:54

The IRS has not previously indicated that the penalty waiver is any more likely if you elect the 5 year rule and drain the account. Of course, you can drain the account without electing the 5 year rule because life expectancy is the default method on all IRA accounts (but maybe not on employer plans). If you drain the account without electing the 5 year rule you only need to request the waiver on what your life expectancy RMDs would have been, not on the entire balance. But if you elect the 5 year rule, because that deadline was missed you need to request the waiver on the entire balance of the account. Given no indication that the waiver would not be granted as long as the 5329 forms are completed correctly according to the instructions, it would be best to maintain the Roth as long as possible to generate tax free gains.