Do You Have a Required Distribution From Your Inherited IRA?

Friday, November 21, 2014

By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott

This question comes up a lot at this time of year. Here are the rules.

If the deceased account owner did not take all of his required minimum distribution (RMD) for the year, the beneficiaries must take any remaining RMD by the end of the year. The RMD does not go to the decedent or to his estate. It is calculated as though the account owner lived for the entire year. When there is more than one beneficiary, the RMD is generally pro-rated among the beneficiaries according to the percentage of the IRAs they inherited.

A non-spouse beneficiary’s own RMD will begin in the year after the IRA owner’s death. As long as the beneficiary did not inherit the IRA through the estate, the beneficiary can use her own life expectancy to calculate the RMDs.

Retitling the Inherited IRA

It does not matter when the account is retitled; the inherited IRA belongs to the beneficiaries as soon as the account owner dies. The beneficiaries must take any RMDs that are due. The penalty for a missed RMD is 50% of the amount not taken. That is not a typo! The penalty is 50%.

Many custodians automatically retitle the account or require that the account be split by the beneficiaries before making any distributions. Generally this is to ensure that the tax reporting is done correctly. It does not create a problem when the beneficiaries need to take the year of death RMD that did not go to the IRA owner. The tax code allows an RMD to be transferred from one IRA to another.

So be sure to take those RMDs from your inherited IRAs before the end of the year. If you miss the deadline, you should take the RMD as soon as possible. You will need to file IRS Form 5329 to report the missed distribution and the penalty. You can request a waiver of the penalty for reasonable cause. If you do not file Form 5329 the statute of limitations does not start to run and IRS can levy the penalty, interest, failure to file penalties, and perhaps the accuracy related penalty. It is much easier to take the RMD on time!

 

 

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