By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott
If you inherit the IRA of an individual who has a required distribution for the year, you – as the beneficiary – must take any remaining required minimum distribution (RMD). Here is a situation that deals with this issue.
John and Sue were both 75 years old last year. They both took their RMDs for the year. John died early in December. Sue was his beneficiary. She rolled his IRA into her own IRA in January. The question was – “What is Sue’s RMD for this year?"
Your RMD is generally based on your prior year-end account balance. Sue had her prior year-end balance, which did not include the amount inherited from John. It was still in the IRA in John’s name at year end. Does Sue base her current year RMD on her account balance only? What happens to the RMD on John’s account?
Under state law, an asset that passes through a beneficiary form belongs to the beneficiary at the instant they inherit it. It doesn’t matter if the beneficiary’s name is in the account title or not. It belongs to the beneficiary from that moment on. Sue must calculate her RMD for the year on both balances.
It is important that beneficiaries know this. Any RMD that is not taken is subject to a 50% penalty on the amount not taken. If Sue takes only the RMD based on her IRA balance and leaves out the RMD based on John’s account balance, then Sue is going to owe the penalty on the RMD she did not take.
Another question that we get frequently is, “Can’t we leave the IRA in the name of the decedent and have the estate take the RMD before we transfer the account to the beneficiary?” The answer is no, unless the estate is the beneficiary.
IRA rules for beneficiaries can get very complicated. We recommend you consult a financial advisor with expertise in this area. You can find a list of Ed Slott trained advisors on our website, www.irahelp.com.