What if you don’t meet the time limit?

Submitted by lawrence mauskapf on Wed, 2020-09-23 00:05

I read a lot of these posts about 5 year and 10 year time limits for zeroing out IRA accounts. Do custodians of these plans empty them out if the account holder fails to do so before the time limit? If the accounts are not zeroed out by the custodian what are the tax penalties, if any?



Submitted by David Mertz on Wed, 2020-09-23 04:01

  • No.  The custodian has no way to be certain what the distribution requirements are, so it’s the responsibility of the beneficiary of an inherited IRA to ensure that the requirement is met.  Failures are subject to a penalty of 50% of the amount that was required to be distributed, but the IRS has the authority to waive the penalty for reasonable cause (which can probably be just about any cause other than intentional failure) upon taking steps to correct the distribution shortfall.
  • Only inherited IRAs can be subject to the 5- or 10-year rule, but Eligible Designated Beneficiaries can still do life-expectancy-based RMDs, and the custodian cannot be certain which of these applies.  Also, a spouse beneficiary defaults to ownership by failing to take a required distribution as beneficiary and, depending on the spouse’s age, then becomes subject to RMDs based on life-expectancy as owner.
  • If the account goes unclaimed by the beneficiary, the custodian might eventually escheat the account to the state and treat it as a distribution.

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