Inherited IRA vs IRA 5 Year Distribution Rule
I have a client who is 35 yrs old. She is the sole named beneficiary to her mother’s Profit Sharing account. Her mother died at age 65 in 2017. My client has not taken any RMDs from the account. At the time of death the Profit Sharing account had a value of $350,000. Now as of Oct 2020, the value is $550,000. My client is in the 37% tax bracket and will be for the foreseeable future. Because my client’s mother died before 1/1/2020, the beneficiary should be eligible to use the old stretch IRA rules and not the 10 year IRA distribution under the SECURE ACT.
Can she still establish an Inherited IRA or is she stuck with the 5 year complete distribution rule?
One idea I thought was right now in 2020 to take the missed RMDs for years 2018 and 2019 and skip 2020 per the CARES ACT. Then setup the Inherited IRA and continue to take the RMDs going forward.
My goal is to establish an Inherited IRA and not take the money out under the 5 Year Rule.
Thank you for your response.
Permalink Submitted by Alan - IRA critic on Thu, 2020-10-29 17:55
She can still do a direct rollover to an inherited IRA, however the beneficiary RMD amount is more complex. SInce the direct rollover was not completed by 12/31/2018, the PS plan rules will dictate what her inherited IRA RMDs will be, and by default she might be subject to the 5 year rule. If that is the case, the inherited IRA must be drained by 12/31/2023 since 2020 will not be counted as one of the 5 years. If the PS plan uses life expectancy as the default rule, then that would extend to the inherited IRA. However, since the PL plan has NOT distributed a life expectancy RMD in 2018 or 2019, that may well be an indication that the 5 year rule has been activated due to client’s failure to act in a timely manner.
Permalink Submitted by David Demars on Thu, 2020-10-29 19:54
Thank you very much for your response. Does anyone else have any input? I would like to suggest to the client that she take the RMD for 2018 and 2019 right now, ask for an abatement from the IRS for 50% tax penalty because she did not take it and roll the money into an Inherited IRA. This reasoning is following a similar logic for clients who reach age 70 1/2 (now age 72) and forgot to take the RMDs. Does anyone have another solution that would allow the client to do an Inherited IRA?