5 year rule

Submitted by Steve Merdinger on Tue, 2024-02-20 15:40

Husband was 75 at time of passing in 2014 , so taking RMD’s . I am told an inherited IRA was opened for his wife who was age 60, She passed in 2017 at age 63. i am told that IRA was split into inherited IRA for each child. Apparently no RMD was taken in 2017 or 18. At this point the custodian (which has been the same throughout is saying the only recourse is to empty the account now under the 5 year rule ( even though it is year 6 they get the extra covid year) my question is whether or not something different should have been earlier in the process that would avoided this as the only option? are there any other options available to them at this point?



Submitted by Alan - IRA critic on Tue, 2024-02-20 18:28

There are two possibilities here per IRS rules. If wife elected to assume ownership before passing OR failed to complete her beneficiary RMDs for 2015 or 2016, wife defaulted to ownership status, and the children would then be designated beneficiaries rather than successor beneficiaries. In that case, they should have been taking LE RMDs since 2018 and if they didn’t the custodian’s IRA agreement might have been defaulted to the 5 year rule, which ended in 2023. This would be rare, as most IRA aggreements have LE as the default option, under which the children could make up their missed RMDs and file a 5329 for each deficient year to request the penalty waiver.
The other scenario is that wife did complete her beneficiary RMDs in 2015 and 2016,  making the children successor beneficiaries who would then have been required to continue wife’s RMD schedule. The 5 year rule never applies to successor beneficiaries.
The custodian should be able to explain their position, but it is very likely that just want these beneficiary IRAs off the books. It’s rare that an IRA custodian would “force out” distributions, so if the children want to avoid a total distribution, they might refer to IRS PLR 2008-11028 in which the IRS allowed a beneficiary to “restore the stretch” after missing beneficiary RMDs. In that case, the beneficiary would have to calculate the missed RMDs, make them up and file Form 5329.  
Do the beneficiaries want to attempt to restore the stretch or not?  Per the above, are they designated beneficiaries due to wife acquiring ownership, or are they successor beneficiaries?

Submitted by Steve Merdinger on Tue, 2024-02-20 18:51

yes, i beleive that is what the beneficiaries would like to do. so if i am understanding correclty the wife should have been takin RMD’s even though she under 70.5 how we get help for the beneficiaries , thanks 

Submitted by Alan - IRA critic on Tue, 2024-02-20 19:05

Yes, wife should have been taking beneficiary RMDs unless she assumed ownership. If she did nothing, neither assuming ownership OR taking the full beneficiary RMDs for those 2 years, she would have defaulted to ownership, and if that happened the IRA would still be titled as inherited, but for RMD status it would be owned. Therefore, the children need to determine this history in order to know what their beneficiary RMDs should have been in 2018, 2019, and 2021-2023. They are obviously going to much higher if they must use wife’s remaining RMD schedule, as she was older than they are.

Submitted by Steve Merdinger on Tue, 2024-02-20 21:09

if she took the ira an inheritted IRA does tha that mean that she didnt take ownerhsip and that is what is casuing the isse? should they be able to request copies of all of the paperwork going back to his death?

Submitted by Alan - IRA critic on Tue, 2024-02-20 22:46

It’s not clear what is triggering this issue with the custodian, but I would guess that they simply want to cash out the account and are not even considering whether the wife should have been treated as the owner or not. There mention of the 5 year rule suggests that they are treating the wife as the owner or the 5 year rule would not be applicable. The children need to call the custodian and ask to speak to an experienced staffer who can explain their position. To be clear, the wife originally had to take the IRA as the beneficiary, after which she could have elected to assume ownership, and she should have because she was over 59.5. If that occurred the account would have been retitled with wife as the owner and not the beneficiary. However, if wife did not assume ownership but failed to complete the 2 years of RMDs, she technically defaulted to ownership anyway. Perhaps wife’s tax returns for 2016 and 2017 could be checked and if there were no IRA distributions for either year, then she defaulted to ownership because she did not complete beneficiary RMDs. That may be easier than trying to request old statements from the custodian. 

Submitted by Steve Merdinger on Thu, 2024-02-22 13:23

One lsat question, are you saying that regardless of whether an error was made on the initial paperwork they should stil have the option of filing the form vs taking total distributin this year?

Submitted by Alan - IRA critic on Thu, 2024-02-22 18:24

Yes, they should complete and return the form, but not seeing the form I don’t know if it spells out options or not. Have the children not been taking any RMDs since they inherited the account?

Submitted by Steve Merdinger on Thu, 2024-02-22 18:53

they have been but they missed a couple years directly following her death, we are requesting copies of the all account opening paperwork icluding bene disgnation going back fathers passing , then mothers passing 

Submitted by Alan - IRA critic on Thu, 2024-02-22 19:57

They should also ask for copies of any IRA statements for 2015 and 2016 to determine if the wife took distributions and how much. If she didn’t, that means that she defaulted to ownership of her inherited IRA. This is the best outcome for the children, because if wife owned the IRA, the children are designated beneficiaries, not successor beneficiaries. They would then use their own ages for annual RMDs and should be able to make up the missed RMDs for 2018 and 2019 and file a 5329 to request the penalty waiver. But if wife was the beneficiary at her death instead of the owner, the RMDs for the children would have to complete wife’s RMD schedule, and the IRA would not last as long as their RMDs would be larger. Either way, they should make it clear that a total distribution is not to be made by the custodian.

Submitted by Steve Merdinger on Fri, 2024-02-23 14:48

thank you for all of the help, are these threads archived under my log in?

Submitted by Alan - IRA critic on Fri, 2024-02-23 17:42

I don’t think you can search by your user log in for your own posts, but you can do a search by subject.

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