Inherited IRA Reinvested??
I have a 30-year-old disabled client that inherited an IRA from her deceased uncle in 2013. The Beneficiary IRA is held at another custodian, and I am reviewing their statement. It appears that all Dividends and Capital Gains earned during the year are being reinvested to purchase more securities within the account. So the client is actually not receiving any money. I know that the client qualifies for the stretch IRA treatment since death occurred in 2013, and client is subject to annual RMD based on her life expectancy. I also know that RMDs are not eligible for rollover. I’ve done a lot of education and read Ed’s book. Something about this client’s situation doesn’t smell right. Is it possible that the RMD amount can be re-invested within the Beneficiary IRA?
Here is the Account Activity Summary
Total account value last statement 34,870.85
CASH ACTIVITY
Beginning Balance 18,987.13
Money coming into your account
Interest 0.46
Dividends 79.85
Capital gains 499.09
TOTAL 579.40
Money going out of your account
Funds to purchase securities -578.94
Ending Balance 18,987.59
Net change cash activity 0.46
SECURITY ACTIVITY
Beginning value of priced securities 15,883.72
Securities purchased 578.94
Change in value of priced securities 791.16
Ending value of priced securities 17,253.82
Net change in securities value 1,370.10
Total account value as of end of year 36,241.41
Permalink Submitted by Alan - IRA critic on Tue, 2021-04-20 20:57
An RMD must actually be distributed from the inherited IRA and Form 1099R issued. Apparently this has not been done. If the uncle passed prior to his RBD, some IRA agreements would default to the 5 year rule in this situation meaning the inherited IRA should have been drained by 12/31/2018. Beneficiary could probably drain the account now and file a 5329 for a penalty waiver. These are typically granted when the taxpayer self reports and makes up the late RMDs.
The IRS has also been allowing a taxpayer to “restore the stretch” by making up each year’s late RMD and filing a 5329 for the penalty waiver. This would avoid the 5 year rule.
Perhaps not taking RMDs was intentional due to potential loss of govt benefits. But there is no exception for this understandable situation. Note that the RMDs for an age 20 something beneficiary on this low account balance are extremely low, well under 1000 per year. RMDs were waived in 2020. Beneficiary could bring the RMDs current including 2021 for roughly 3600. Other factors such as govt benefits requirements should be considered in determining whether to distribute the entire account or just make up the late RMDs and then continue annually with the small RMDs. Either way, a 5329 must be filed to request past penalties be waived after the RMDs have been made up (or account drained if opting for the 5 year rule.)