*Really* Messed Up Inherited IRA RMDs

Submitted by Brandie Conforti on Tue, 2012-02-21 01:44

Hi all, So glad I found this forum.

For context, I inherited an IRA from my dad who passed away in December 2007. At that time we had an estate lawyer who only advised us that the IRA we inherited had to be withdrawn within 5 years of my Dad’s death. Granted I should have paid more close attention at the time, but my mother also passed away 6 months earlier and I was in a complete state of shock. Fast forward to the beginning of the 5th year after my Dad’s death and in doing research about drawing down the IRA I have now learned about the default to a stretch IRA. My Dad had not yet begun taking distributions on the IRA. In calculating the 50% penalty on the missed RMD years (2008, 2010, 2011) it is quite reasonable in comparison to taking the tax hit of pulling out the full IRA this year. I have read about the private ruling on missed RMDs not causing a default to the 5 year rule but am wondering if missing three years of RMDs as opposed to two will matter? And if it doesn’t is it possible file one form 5329 paying the penalty on the three tax years or if we have to file a form 5329 for each tax year plus an amended 1040?

Thank you, in advance, for your help.



Submitted by Alan Spross on Tue, 2012-02-21 01:54

To make sure the response is correct, please confirm:
1) Your father passed PRIOR to his required beginning date (4/1 following the year he would have reached 70.5)
and
2) You were named as a designated beneficiary directly on his IRA, as opposed to his IRA having named your mother and you therefore inherited the IRA through his estate.



Submitted by Brandie Conforti on Tue, 2012-02-21 02:15

[quote=”[email protected]“]To make sure the response is correct, please confirm:
1) Your father passed PRIOR to his required beginning date (4/1 following the year he would have reached 70.5)
and
2) You were named as a designated beneficiary directly on his IRA, as opposed to his IRA having named your mother and you therefore inherited the IRA through his estate.[/quote]

1) Yes. My dad was 67.
2) Yes. I was the listed secondary beneficiary. My Mom was still the first but my Dad hadn’t yet changed that. But as there were two beneficiaries, the IRA did not pass through his estate.

Thank You!



Submitted by Alan Spross on Tue, 2012-02-21 03:29

I think you will be able to restore the stretching ability to your inherited IRA, particularly since you are still within the 5 year period. To do that you need to make up all the former RMDs and I see that you are aware of the RMD waiver for 2009.
You may even want to request a penalty waiver for “reasonable cause” and use the best plausible reason. If the IRS refuses it just means you will owe the penalty, but will probably still be able to use the stretch. If you choose not to risk the chance that the waiver request could result in refusal of the stretch, just pay the 50% penalty for each of those years.

In either case, download the correct edition of Form 5329 and fill it out correctly for each of the first two years. You do not need a 1040X. You can include the 2011 one with your 2011 return. If you choose to puruse the penalty waiver, I suggest that you include a copy of the IRA distribution statement that totals the 3 years of RMDs, circle the amount that applies for each year and include a copy with each 5329. If you decide to just pay the 50% excise taxes, the IRS may also bill you late interest on the 2008 and 2010 excise taxes.

See the 5329 Inst, p 6 for instructions on how to complete the form when requesting the waiver.

FYI, here is a copy of Ed’s article about the referenced letter ruling, PLR 2008-11028. There is no mention of requesting the waiver, but it is probably worth the effort to try:
http://www.financial-planning.com/fp_issues/2008_7/saving-stretch-613061…



Submitted by Bruce Steiner on Tue, 2012-02-21 04:56

There’s no harm in asking for a waiver of the penalty, other than a small amount of legal fees if a lawyer (preferably a different one this time) prepares the request.



Submitted by Jennifer Winkle on Mon, 2012-09-10 23:04

I have a similar situation as beconforti, but may be worse I’m ashamed to say. My mother died in 2005 when I was 35. I am the only heir and was named beneficiary on all her accounts. Most accounts – 401K, variable annuity were distributed to me based on the custodians direction with no choice for stretching out over my lifetime. I did not question though based on my inexperience and lack of knowledge on the stretch option. The only account that was not distributed is an IRA. She passed away at age 60 so no RMDs yet for her. I spoke with the financial advisor where the IRA was held and asked what I needed to do. I was advised by the custodian that I would need to put the account in my name by December 2009. I asked when the funds would be taxable to me and was told, “When you sell the stocks and ask for a check.” I completed the paperwork and thought I was finished in December 2009. I ran across an article just last week talking about RMDs and penalties and now know that is not true. I’m learning now that the account should have been distributed by December 2011 if using the five year rule. I looked at the account and it is listed as an inherited IRA with my mothers name and my name as beneficiary in the title so all that was done is basically a title transfer? I’m panicking…I realize I have a problem now and am hoping someone can offer some advice as to the best way to go about correcting this without paying a penalty of 50% of the entire account balance.

1) Should I calculate what the RMDs would have been for 2006, 2007, 2008, 2010, and 2011 (I’ve also learned this week in researching about no RMD in 2009) and take that distribution now? Does the distribution need to be separated by year (separate checks from the account) or can I calculate and ask for one lump sum and show the IRS the calculation for each year summing to the total distribution?

2) I then set up automatic distributions to show the IRS that I am not going to have this problem again?

3) Do I fill out a form 5329 for each year and send all together at once immediately following the distribution? How do I explain what happened for my “reasonable cause” statement? I have no email from the custodian stating what he told me.

4) Is this too long of a period of time to keep the stretch and will it be automatically rejected by the IRS? If I ask for a waiver of the penalty based on lifetime RMDs, is it likely they will reject it and require me to distribute full amount and asses 50% penalty on the full balance (for which I have not asked for a waiver)? Do I have a better chance to keep the stretch if I don’t ask for or a waiver of the penalties for those years of missed RMDs?

ANY advice would be greatly appreciated!!!



Submitted by Alan Spross on Mon, 2012-09-10 23:34

Under IRS private letter ruling 2008-11028 (see link below), the IRS will allow you to restore the lifetime stretch in this situation, but under that ruling the distributions had to be made up to date and the 50% penalty paid on the delinquent distributions. You are probably young enough that it is worth pursuing this since your RMD divisors are probably high (=s low RMD %). You might as well add in your 2012 RMD at this point as well.

http://www.financial-planning.com/fp_issues/2008_7/saving-stretch-613061…

In addition, there is not much downside to proceeding a step further and requesting that the penalties be waived for reasonable cause, and file a 5329 for each year (except 09 and 2012) using the most viable excuse you can muster for the reason the RMDs were overlooked. Add in that you took out all the back RMDs and the current year RMD when you discovered the oversight. Then wait and hope the answer you get is positive. If the IRS insists on the penalties, they may also bill you late interest on the payments. See p 6 of the 5329 Inst for details on requesting the penalty waiver. Note that it is possible that the IRS will make you make a choice between maintaining the stretch vrs waiver of the penalty, including the waiver you would also seek under the 5 year rule.

It is too late to opt for the 5 year rule to eliminate the penalty without any question because that date expired on 12/31/2011 as you know. Therefore, by restoring the stretch you avoid the penalty for the balance of the IRA and in addition you will have only one year (2012) where you have a large bubble of taxable income coming out in one year.



Submitted by Jennifer Winkle on Tue, 2012-09-11 01:57

Thank you for such a prompt response! As far as a “viable excuse”, any suggestions for how to explain to get to reasonable cause in the letter? I know that “I didn’t know” is probably not an excuse and as I stated in my previous message, I don’t have a written document or email from the custodian with what was said to me as it was a phone conversation. Any suggestions from previous experience of anyone on the forum is welcomed. I had contacted all custodians for her other accounts as well in the year of her death (401K and annuity) and liquidated them in TOTAL according to the custodians’ instructions (and paid taxes on those full balances in the same year as I was not made aware of any option to stretch those payments, which makes me sick now to think about). Will the fact that the other accounts were liquidated and quite a bit of tax was paid quickly after her death and unnecessarily early help?

Also, does the catch-up distribution need to be made in separate payments or is one lump sum totaling all the years RMDs OK?

Thank you again!



Submitted by Alan Spross on Tue, 2012-09-11 02:41

You can take the distribution is a lump sum. You probably know that you must calculate each RMD using the divisor for your age in the year following your mother’s death and then reduce that divisor by 1.0 for each year thereafter. For 2010, reduce the 2008 divisor by 2.0 and proceed from there. After you get the total you can ask for that amount in a single distribution. The custodian will add them all up on one 1099R anyway even if you took them separately.

For the “reasonable cause” explanation, indicate that the custodian did not notify you of your RMD requirements, that you found out about this yourself and then immediately acted to withdraw all the delinquent RMDs. I don’t think that the other account distributions would help your case enough to present that reason. After taking the distribution, you could copy the distribution statement and include it with your explanation and show each year’s RMD breakdown. Download each year’s edition of Form 5329 and complete them per the 5329 Inst, p 6. Note that line 53 should be -0- in all cases as you will be requesting a full waiver.

The IRS has been very lenient in waiving the penalties so far, although 6 years is on the outer edge of what they typically see. I wouldn’t mention anything about continuing the stretch from here on, as there is no specific procedure for that. The IRS will contact you if they expect the 5 year rule to be in play when they address your penalty waiver since if you were restricted to the 5 year rule, then your penalty waiver would have to entail 50% of the IRA balance on 12/31/2011. I never hear about cases where the IRS insisted on the penalty given the proper procedure for requesting a waiver.



Add new comment

Log in or register to post comments