(Pre-SECURE) IRA owner dies past RBD. Does 5-year rule ever apply to designated bene?
I feel like there is a Q&A on this, but I can’t seem to put my finger on it:
IRA owner Dad dies in 2018 at age 78 (past RBD). He took his RMD for the year of death.
Beneficiary Son failed to take the first stretch RMD by 12/31/19.
Because of the missed stretch RMD, does Son default to out-in-five as his longest distribution option? Or does he default to Dad’s remaining life expectancy using Table I?
There is language in Pub 590B stating that “the 5-year rule never applies” when the owner dies after RBD, so I am not certain that the 5-year rule could ever come into play in my hypothetical.
Any guidance would be much appreciated.
Thank you.
Permalink Submitted by Alan - IRA critic on Mon, 2020-12-14 18:38
It is correct that the 5 year rule never applies for participant deaths on or after the RBD. Therefore, in this situation the only option is to make up the missed RMD using his own age with the single life table, and beneficiary should also request a waiver of the penalty and the IRS almost always grants the request. Beneficiary should take the 2019 RMD as soon as they realize it was missed, and the penalty waiver request is filed on a 2019 Form 5329. Beneficiary should not pay the penalty until the IRS denies the waiver request. The late RMD is taxable in the year it is received and reported on a 1099R by the custodian.
Permalink Submitted by Robert Vashko on Mon, 2020-12-14 19:13
Thanks. So in missing the first stretch RMD, the bene in this hypo has not “blown up” their lifetime stretch option as they would have had the owner died prior to RBD? In other words, there is no way for a bene in this situation to default to out-in-5 by virtue of missing the first RMD?
Permalink Submitted by Alan - IRA critic on Mon, 2020-12-14 21:22
Yes, that is correct. Even for deaths prior to RBD, all IRA agreements I am aware of use LE as the default method, so beneficiary would have to opt into the 5 year rule (pre Secure). And in IRS PLR 2008 11028, the IRS ruled that if the beneficiary missed a LE RMD when LE was the default method, they could “save the stretch” by making up the late RMD. In that particular PLR, the IRS required payment of the excise tax for the missed LE RMD, but since that time IRS has been waiving the excise tax with a properly completed 5329. Therefore, a beneficiary can pretty much escape the 5 year rule if they make up missed LE RMDs. Of course, with Secure these issues now apply only to EDBs.