(inherited) ROTH RMD not taken within 5 years or life expectancy question | Ed Slott and Company, LLC

(inherited) ROTH RMD not taken within 5 years or life expectancy question

Greetings, all. Situation is: ROTH owner died 8/2007. Beneficiary (non-spouse, non-relative) only later discovered their ROTH beneficiary status in 2017, and will take a full distribution asap - if advisable. QUESTION IS: should the Beneficiary (non-spouse) take the full ROTH distribution (account worth about $70k) without delay, and provide the IRS with a 5329 Form requesting a waiver that explains the ROTH lack of awareness, and expect a waiver of penalty? and if so, should the 5329 Form be included with the 2017 1040 Form after receipt of the 1099-R from the broker as evidence of distribution? -- OR -- should the Beneficiary (non-spouse, non-relative) not bet on a IRS waiver acceptance and submit individual 5329s for each year that a lifetime expectancy schedule distribution could have been made, and expect to owe a 50% penalty on each un-distributed amount calculated for each year (excluding 2009)? Finally, would the Beneficiary be allowed to begin a lifetime expectancy schedule distribution series (and pay the penalty on the un-distributed years), or is it too late to distribute anything other than a full distribution now that it is later than 1 year since the ROTH owners date of death? Or in other words, can you advise, please, how to handle this situation properly and to avoid potential penalty? With thanks in advance for your reply.

  • I cannot tell you whether the beneficiary has a better chance of getting the penalty waived by taking a lump sum distribution than by just making up the late RMDs for each year except 2009 when RMDs were waived. Life expectancy is most likely the default method for RMDs in the IRA agreement and PLR 2008-11028 clarified that making up late RMDs will restore the life expectancy stretch. Therefore, if beneficiary wants to preserve the stretch for 2018 and beyond, they should do the extra reconstruction of each year's RMD, and file a 5329 for each late year requesting waiver of the penalty for reasonsable cause. Beneficiary has a great excuse here, but I don't know if beneficiary could document the lack of knowledge. Form 5329 is tricky to complete even though it is only 4 lines, but what goes on each line is not intuitive. The last page of the 5329 Instructions should be carefully reviewed before completing the forms. The penalty should not be paid with the forms as the IRS will advise if the waiver is not granted.
  • Best to make up all the RMDs through 2016 and submit the 5329 forms. Take a distribution for all the prior RMDs, and take another distribution for the 2017 RMD. All distributions are reportable on the 2017 return and since the Roth is fully qualified, no 8606 is needed and no income tax will be due.
  • If the beneficiary does not want to reconstruct each individual RMD year here, that will bring the 5 year rule into play. In that case, a total distribution must be taken, and it is not clear if the penalty is not waived whether it is based on the 12/31/2013 balance or the current full balance.

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