Can Primary Beneficiaries Disclaim and Dictate Where the Inherited IRA Funds Go?

By Sarah Brenner and Beverly DeVeny
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This week’s Slott Report Mailbag examines the statute of limitations on assessing additional tax liabilities on required minimum distributions (RMDs) and answers questions on utilizing disclaimers on inherited IRA funds and planning for and paying estimated tax payments. As always, we recommend that you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

1.

My son, who is an accountant, looked over my data and found that I reported $5,000 too little on my 2009 tax return. Because this is a pension distribution, he is not sure if the statute of limitations has expired as it would in a normal error on the IRS Form 1040. Is there statute of limitations on RMDs?

Answer:
Generally, the IRS has three years to audit your return or assess additional tax liabilities. There are some exceptions to this statute of limitations, but there are no special rules specifically for distributions from pension plans or RMDs.

2.

My father and mothered divorced two years ago after 42 years of marriage. In 1973, Mom quit work and dad continued to work with the plan for them to live on his income and retirement. Dad died at age 70 and four months, so no RMD from his IRAs. He left us four children as his primary beneficiaries with no known contingent beneficiaries. As you can imagine, mom’s financial status is not robust, as she too is 70 and four months, but didn’t have 40+ years to invest in IRAs (mom got the house, dad kept the IRAs).

If 3 of the 4 siblings “disclaim” the IRA, does 100% go to the fourth? If that sibling disclaims 75% (the three shares x 25%), will it go to the “estate” and then be subject to an estate tax? Or is there a way to get the money to mom in the form of IRA and life expectancy distributions?  If all four disclaimed, does that make a difference?

Ideally, (3 of 4) would like our shares of the IRA to go to mom so she can retire with as little tax implications as possible.

Answer:
When a beneficiary chooses to disclaim inherited IRA funds, the funds will then go to the next beneficiary entitled to receive the funds. How is that beneficiary determined? Generally, the beneficiary designation form makes this determination so your first step must be to examine the language of that form. Often, these forms provide that if there are multiple primary beneficiaries and one beneficiary disclaims, that beneficiary’s portion would be split among the other beneficiaries.

If you and your siblings all disclaim as primary beneficiaries then the funds would go to the contingent beneficiary. If none is listed, then the funds would go to the default beneficiary as provided by the terms of the document. Sometimes this is the IRA owner’s estate, but not always.

One important rule to keep in mind is that when you disclaim, you are not able decide who you would like to receive the funds instead of you. It would not be possible for you and your siblings to disclaim and direct that your Dad’s IRA proceeds be paid to your mom.

3.

I have read a few of Ed Slott’s books, and I have a question that I hope you can answer, as I am not sure it is discussed in the books.

I am wondering if I have to pay quarterly tax on my RMD, even if I take it as a lump sum in the latter part of the year. I know in your books, you talked about taking a RMD lump sum in November verses December in case I get sick or forget, which is great advice in my opinion.

Currently, I receive Social Security and a pension. In November of next year, I plan to take the RMD from one of my IRAs.

I heard that one option is calculate my total expected taxable yearly income (Social Security, pension, dividends, and RMD), estimate the taxes that would be due, take that value and divide by four and then plan and make four equal payments over the year.

I also heard that this is not necessary, that all I have to do is take my lump sum in November and ensure the IRA custodian retains a certain amount for tax purposes.

What’s the best way?

Sincerely, 

Robert

Answer:
Good news! If you choose to withhold taxes when you take a distribution from your IRA, that withholding can be used to satisfy your estimated tax payments for the year no matter when the distribution is taken. Taking your RMD as a lump sum in November and electing to have adequate withholding can be a good strategy. Be sure to consult with a knowledgeable financial advisor who understands the details of your tax situation.