Bene Missed First RMD

Friday, October 28, 2016

By Beverly DeVeny
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What happens when a beneficiary misses their first RMD?

IRS answered this question recently in Information Letter 2016-0071 in response to an inquiry. The question was if the 5-year rule was automatically required when a non-spouse beneficiary named on the beneficiary form missed their first required minimum distribution (RMD) in the year after the death of a Roth IRA owner. As unbelievable as it may seem, IRS had never before directly addressed the issue of a beneficiary missing their first RMD.

The distribution rules mandate that a named (designated) beneficiary non-spouse beneficiary begin taking RMDs by December 31 of the year after the account owner’s death. The age of the beneficiary does not matter – all named non-spouse beneficiaries have an RMD in the year after death.

The only time the 5-year rule automatically applies is when 1) there is no named beneficiary AND 2) the IRA owner or plan participant dies before their required beginning date (RBD) which is April 1 of the year after attainment of age 70 ½. However, the IRA or employer plan document can say that the 5-year rule applies after the owner’s death IF the beneficiary does not take an RMD by the December 31 deadline.

There is an interesting quirk here for Roth IRAs. Since they have no RMDs during the account owner’s lifetime, there is no RBD, so the Roth owner always dies before the RBD. This makes it imperative that the Roth IRA owner name a beneficiary otherwise the payout period is only 5 years.   

The IRS’ answer to the question of what happens when the first RMD is missed is that the distribution period is “made in accordance with these rules, and isn’t based on whether distributions in fact begin timely under the applicable rule.” In other words, if the document defaults to the life expectancy rule for a named non-spouse beneficiary, that rule will apply even if the first RMD is missed. This is good news for named non-spouse beneficiaries with plans that allow for stretch distributions.

In addition, IRS noted that taxpayers can request a waiver of the 50% penalty owed on a missed RMD by filing Form 5329 and attaching an explanation of the missed RMD.

 

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