Delayed Discovery of Granddaughter’s Inherited IRA

Submitted by Edd Rhoades on Thu, 2024-01-04 04:38

My granddaughter recently discovered she was the beneficiary of the IRA held by her stepfather. Her stepfather passed away in 2016 and my granddaughter was never notified of the IRA. The company holding the IRA has indicated she would need to establish a beneficiary account and take a lump sum distribution. Evidently, she is past the period of time when she could have requested to distributions under the 5 year rule in effect at that time. Since it appears she will need to take a lump sum distribution, will it be satisfactory with the IRS if should she reports and file taxes on the full distribution as part of her how 2024 tax return or is there other steps that need to be addressed?



Submitted by Alan - IRA critic on Thu, 2024-01-04 15:37

Almost all IRA agreements default to LE RMDs for beneficiaries, not the 5 year rule (assuming step father passed prior to RBD). Under IRS PLR 2008-11028 the IRS allowed a beneficiary to make up late LE RMDs and preserve their stretch. Normally, the IRA agreement does not give the custodian authority to force out distributions. However, the account balance, the need for funds, and the added calculations (determining each year ending account balance) and reporting may not warrant the beneficiary pursuing LE RMDs. Either way, there will be a need to file multiple Form 5329 forms to request that the IRS waive the penalty for missed RMDs. 

Submitted by Edd Rhoades on Fri, 2024-01-05 17:37

I greatly appreciate your feedback. I have some addittional questions for clarification on how to best proceed. They are in a general comment I made below before seeing the reply option specific to your post.  

Submitted by Edd Rhoades on Fri, 2024-01-05 17:30

To clarify next steps, since it appears pursuing LE RMD’s is not an option, she would need to file completed separate Form 5329 forms for each year from 2017 through 2023 with the the IRS.  Once the full distribution is received, am I correct in assuming that these forms  could be mailed to the IRS in one packet with an explanatory letter requesting waiver for the penalty for past missed RMDs or should the Form 5329 for 2023 need to be submitted separately with her 2023 tax return when filed in 2024 (again with an explanatory letter)?  Since the full distribution would be received in 2024, am I correct in assuming the Form 5329 for 2024 would be included with her 2024 tax return, which would be filed in 2025, along with payment of taxes on the full distribution?   

Submitted by Alan - IRA critic on Fri, 2024-01-05 22:09

If she is not interested in preserving the stretch option, under the 5 year rule there are no annual RMDs, just a total distribution in year 5, which in this case would have been 2022 because 2020 does not count per the CARES Act. As such a 5329 would be due for 2022 with a 1040 X, and a 5329 for 2023 which can be filed with the 2023 tax return. The amount due for those years would have been the balance at the end of 2022 and 2023 respectively. But to request the penalty waiver, the total distribution must have been taken, and will be taxable in 2024. A 5329 will not be required for 2024 if the account is drained in 2024.

Submitted by Edd Rhoades on Tue, 2024-04-23 03:49

In follow-up to your response, I would appreciate some further clarification since she received a full distribution of the inherited IRA in late April 2024.  As indicated above, she will proceed now with filing an amended 2022 tax return with a 2022 5329 reporting the balance at the end of 2022, since that was when the full distribution was due under the 5 year rule.  Since she received the full distribution of the inherited IRA account in 2024, should she file a 2024 5329 with her 2024 tax return, instead of filing a 5329 with an amended 2023 tax return.  Also, on with this tax return, should the 5329 show the amount for which she is requesting waiver of penalty as the full amount actually received as the the lump sum distribution in April 2024 or should this amount be reduced by the balance shown on the 2022 5329?

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