Inherited Traditional IRA – Minor Child – Inherited Via an Estate – Stretch factor is 8.1 in 2018
IRA owner (my mother) did not have a designated beneficiary for her IRA’s. IRA owner died in 2017 at age 82. IRS single life expectancy requires to use 9.1 for 2017 then reduce by 1 for each subsequent year. The IRA will have to be drained in about 8 years.
One of the heirs is a minor child that will be subject to horrid 2018 Kiddie Tax rules. The RMD for 2017 has been taken so not much can be done for the child for tax year 2018. The RMD allocated to the child was $12,730.
The RMD for the child if using the correct IRS factor of 8.1 will result in an RMD of about $30,000 for 2018.
Here is my question. Is the 50% penalty limited to what was missed for each year only, or is there some sort of carryover of the missed RMD that is added to subsequent years? For example, say that we decide to pay the 50% penalty and not take the RMD for 2018 which will result in paying $15,000. Under the kiddie tax, the tax would have been about $20,000 on all sources of income including Social Security.
I have scoured the 5329 instructions and found nothing that indicated that you had to worry about past missed RMD’s and that this penalty is limited to a specific year.
My strategy would be to continue paying the penalty for the 8 years and simply take the RMD for each year using the child’s single life expectancy of 72.8 for 2018, then reducing by 1 for each year after. Once we have gone beyond the 8 year period for the estate, can I assume we would be in the clear then then no access accumulations would be occurring?
If I were able to use this strategy, I believe it would be of benefit to the child. The child’s social security would then most likely become non-taxable to a reduced AGI.
It is very unfortunate that the IRA owner, (my mother) did not have designated beneficiaries listed and the IRA had to pass through the estate.
Looking for a legitimate strategy to reduce tax liability.
Permalink Submitted by TaxLadyEA2010 on Sat, 2018-09-08 16:06
After thinking about my post, I believe this will not work because the entire balance would need to be depleted after 9 years so the 50% penalty would apply to the whole balance. I tried to delete the post but was not successful. I am thinking about where the Kiddie Tax Rules apply if the minor files their own return and is not claimed as a dependent on parent’s return. The child would be providing more that 1/2 their own support in this case. This would allow the child to use the single tax bracket instead of the trust and estate tax brackets.
Permalink Submitted by Alan - IRA critic on Sat, 2018-09-08 17:39
Have you considered a qualified disclaimer on behalf of the minor? Additional funds would go to other estate beneficiaries (was there a will?), who would have to collaborate to make tax adjusted gifts to the minor, so this would probably not be workable if there were very many such other beneficiaries.
Permalink Submitted by TaxLadyEA2010 on Sat, 2018-09-08 18:16
Yes, I have considered a qualified disclaimer but it wouldn’t be fair to the other beneficiaries having to pick up the extra tax liability. I have already created the sub accounts for each Will beneficiary. The Firm handling the IRA’s says they would have to have a court order to accept the disclaimer.This whole situation is very bad for everybody. I just researched the Kiddie Tax Rules and even though the child is paying for more than half her support, that doesn’t matter with respect to Kiddie Tax. Anyone under age 18 is subject to Kiddie Tax.The will says that everything is to be split equally. Not very many people even understand how much the Kiddie Tax rules are changing for 2018. Even the IRS website is still talking about how the child pays at parents rate.