RMD of Inherited IRA impacting prior years | Ed Slott and Company, LLC

RMD of Inherited IRA impacting prior years

We have a client that inherited two IRA accounts that were her late mother's.

• Approximate values: $300,000 and $30,000

• Her mom was under the age of 70 ½ when she died in 2014.

• Client took RMD’s in 2015, 2016 & 2017 from the $300,000 account only, based on the $300,000 market value.

• The $30,000 account was untouched.

• Realize now that we took out too little using the life expectancy method for all accounts in aggregate.

• I understand there is also 5 year method for distribution.

o Can we treat one account (the $30,000) using the 5-year and the other account using the life expectancy method and completely withdraw the $30,000 account within the 5 year window?

o If not, should the client immediately take RMD’s in the correct amounts for 2015, 2016, and 2017 for the $30,000 account and file a 5239 for relief from penalties?

o Do I also need to file an amended return for 2015, 2016 and 2017?

  • In most cases the client would have a choice between restoring the stretch by making up the delinquent LE RMDs on the small account or electing the 5 year rule. That said, there are still some IRA agreements out there that state the election of the 5 year rule must be made in writing by the end of the year after the owner's death, similar to some qualified plans. Even with that requirement, it is not clear if any custodians attempt to enforce such a provision.
  • Election of the 5 year rule for the small IRA would eliminate the need to file 5329 forms for 2015-2017 and the account would then have to be drained by 12/31/2019. There would be no need to file an 1040X forms.
  • The other option is to calculate and make up the late RMDs ASAP and file a 5329 for each year the LE RMD  fell short requesting that the penalty be waived for reasonable cause. The IRS almost always will waive the penalty even if there is no good excuse when the beneficiary self makes up and self reports the shortfall.
  • Technically, the 5 year rule should not be elected if prior LE RMDs were aggregated with other inherited accounts from the same beneficiary, but that is not the case here.

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