Inherited IRA Eligible Designated Beneficiary
Hello,
I have a client who inherited an IRA and is an eligible designated beneficiary. If the client elects to receive distributions over 10 years or over the remainder of his life, can he later (in year 7 for example) change his mind and take a lump-sum distribution of the remaining funds without incurring the early distribution penalty? Or is he locked into the 10-year or lifetime distributions once he’s made the initial decision? Thank you.
Permalink Submitted by Alan - IRA critic on Fri, 2021-12-03 00:57
An EDB can only elect out of LE and into the 10 year rule if the IRA owner passed prior to RBD. Neither election would bar the beneficiary from taking a lump sum distribution or higher distributions than required. And there is never a 10% early withdrawal penalty on inherited IRA distributions. However, the IRS could bill the 50% excess accumulation penalty for RMD failures even though they routinely waive that penalty with a properly completed 5329 filing after the shortfall is made up.
A beneficiary’s option to change their mind on the LE or 10 year elections after the end of the second year is not yet clear. An election is not required until the end of the year following the year of death. The IRS in PLR 2008 11028 and since have been allowing a designated beneficiary who fell short on LE RMDs to “save the stretch” by making up prior LE RMDs if they were subject to the 5 year rule. But it is not yet clear if an EDB beneficiary who elected the 10 year rule can later switch to LE. The mechanics of making allowed elections has always been a gray area.