Understanding inherited IRA penalties

Submitted by John L. on Fri, 2019-09-06 21:37

Please tell me if I understand the penalties right for not taking the RMD on time when an IRA is inherited (non-spouse individuals, multiple beneficiaries).

The penalty for a beneficiary not taking the deceased’s final year of death RMD on time (if the deceased hadn’t taken it already) will be a 50% tax when it is taken out.

The penalty for a beneficiary not taking their first year RMD on time would be the same 50% tax. They may also have to use the date of birth of the oldest beneficiary to determine the RMD.

Do I understand this right? And does that mean you have to use the DOB of the oldest beneficiary just for that year, or for every year going forward?

Thank you so much.

JL



Submitted by Alan - IRA critic on Fri, 2019-09-06 23:22

  • The 50% penalty for a late RMD is almost always forgiven by the IRS when a proper 5329 is filed for the applicable year indicating any plausible reason for the delinquency. For year of death RMDs not completed by the decedent, the IRS expects many of these to be late since it takes time for beneficiaries to have the IRA re titled, to sort out the RMD status, and to complete the RMD. Penalties are rarely levied.
  •  For inherited IRAs with multiple individual beneficiaries, the separate account rules allow separate inherited IRAs to be created up to 12/31 of the year following the year of death. For those beneficiaries who have transferred their share to a separate inherited IRA, they will be able to use their own single life expectancy for RMDs. If the deadline is missed, the RMD will have to be based on the oldest beneficiary until the inherited IRA is distributed. The stretch is even shorter if an estate or non qualified trust or charity is included and not paid off by 9/30 of the year after the year of death.

Submitted by John L. on Sat, 2019-09-07 00:18

Alan, thank you! You said: “If the deadline is missed, the RMD will have to be based on the oldest beneficiary until the inherited IRA is distributed.” I think you are saying it would be for ever year going forward, until the inherited IRA is completely distributed. Not just that one year. Is that correct? You are amazing. JL 

Submitted by Alan - IRA critic on Sat, 2019-09-07 00:58

Yes, that is correct. It also applies even after the oldest beneficiary passes or takes a full distribution UNLESS that beneficiary passes or takes a full distribution prior to the beneficiary determination date (9/30 of the year following the year of owner’s death).

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