Minor Inherited IRA
I have a client who inherited an IRA from her grandmother who passed in 2014. She was 12 years old when she inherited it. The grandmother passed at the age of 69 before she began taking RMDS from the IRA CD. Our question is if the client, who is 22 now, should have taken this out years ago. What rules apply to her? Thanks in advance!
Permalink Submitted by Alan - IRA critic on Mon, 2024-09-23 11:25
Client should have been taking stretch RMDs every year since 2015 (except 2020). If the amount in the inherited IRA is large enough, she could make up the missed RMDs, and file Form 5329 for each missed year requesting the penalty waiver for reasonable cause. The IRS would likely accept the waiver requests, but the missed RMD for each year would have to be calculated using the prior year end balance, and that might be challenging. Due to her young age these missed RMDs would be very small. The made up RMDs will all be taxable this year.
But if the IRA is small enough to fully distribute (eg under 20,000), she could take a full distribution, treat herself as subject to the 5 year rule which would have required a full distribution in 2019, and file a 5329 for 2019 and each year since for the full amount. That would avoid calculating the annual RMDs for 2015-2019. She could use the distributions to subsidize her own qualified plan contributions to a 401k or 403b if she is employed and offered such a plan. These pre tax contributions would reduce her taxes and offset the tax from the full inherited IRA distribution, Again, the first plan is preferable unless the IRA balance is quite small.
Permalink Submitted by Andrea Ashley on Mon, 2024-09-23 16:49
Thank you so much!