EDB misses first stretch RMD – default to out-in-five or out-in-10?
Having a debate with a colleague on what happens when an EDB misses their first stretch RMD payment (assuming they don’t ask for relief from the Service).
My colleague believes that the beneficiary will revert to the non-EDB designated beneficiary rules and default to an out-in-10 window.
I believe that the lifetime stretch for EDBs is part of 401(a)(9)(B)(iii)’s exception to the 5-year rule – “will be distributed (in accordance with regulations) over the life of such designated beneficiary”. If you miss that first RMD, you fail the exception to the 5-year and default to out-in-five.
Who is right? Or is it suitably grey that neither of us is right or wrong?
Permalink Submitted by David Mertz on Wed, 2021-02-03 18:21
Neither. If an EDB misses an RMD, they must make the distribution late and file Form 5329 Part IX requesting waiver of the excess accumulation penalty.
Nothing in the tax code explicitly permits an EDB to use the 10-year rule. There is some question about this, though, because the IRS has in the past permitted designated beneficiaries to use the 5-year rule instead of distributions based on life-expectancy when the participant died before RBD even though nothing in the tax code explicitly permitted doing so. The IRS might eventually provide guidance to allow an EDB to use the 10-year rule, but no such guidance presently exists.
For participants dying after 2019, the 5-year rule now only applies to non-individual beneficiaries (estates, nonqualified trusts, etc.), so not in the case described above where the beneficiary is a designated beneficiary.