Missed and Excess RMDs: Today’s Slott Report Mailbag

Thursday, October 11, 2018

By Beverly DeVeny
IRA Analyst
Follow Us on Twitter: @theslottreport

Question:

Hi Mr. Slott,

I have been to several of your IRA continuing workshops over the years. Today I had someone in my office that stated they have not taken the rmd from an inherited IRA for 9 years. Whats your advice in this situation. Thank you for you help in this matter.

Regards,

Craig

Answer:

The first thing you have to determine is whether or not the individual inherited from the decedent or through the estate.

If they inherited from the decedent, then you have to determine if the inherited IRA defaulted to life expectancy payouts. If it did, then the missed RMDs can be made up and the beneficiary can continue to take RMDs each year going forward. If the IRA defaulted to a 5-year payout then the account must be emptied.  

If the individual inherited through the estate then the payout period will depend on the default payout period in the document and the age of the decedent in the year of death. When the decedent dies before his required beginning date (RBD – April 1 of the year after reaching age 70 ½) the five-year payout rule is the only option. If the decedent died after his RBD and the IRA agreement allows, the payout period is based on the decedent’s life expectancy.

When a beneficiary misses an RMD from an inherited IRA, there is a 50% penalty that applies to the amount of the shortfall. The penalty is paid using Form 5498 for the year of the missed RMD. While the penalty is hefty, the good news is that the IRS does waive it for good cause. To get a waiver, the missed RMD must be taken and a letter of explanation filed with Form 5329. You do not have to prepay the penalty to get a waiver.

This is a high-level overview of the beneficiary’s options. You may want to consult with a knowledgeable professional to help you work through these options.

Question:

Hello.  I have a question regarding an incorrect assumption that someone could lump his IRA and 401K RMD together and take the full total RMD from his IRA.  Now that he has done that, and it has been more than 60 days, he has been told that he must still take the RMD from his 401k.  He does not want to take this RMD because he feels that he already took it from his IRA.  Is there any way around this?  Or is there any way to put the “excess” amount he took from his IRA back into the IRA since he should have taken it from his 401k instead?

Rolling the 401k into an IRA at this point wouldn’t help because his 2018 RMD is based on the 401k’s balance at 12/31/17, correct?

Any advice you can give me would be appreciated.

Thank you,

Erin

Answer: 

There is likely no easy remedy for this situation. IRS is allowed to grant an extension of the 60-day rollover period for good cause. There is a self-certification process that some individuals can use as long as the reason for their missed rollover is one of the 11 IRS sanctioned reasons. If the individual does not qualify for self-certification, he could request a private letter ruling (PLR) for an extension of time based on the fact that he received bad advice. There is no guarantee that IRS would approve his request, the IRS fee for this type of PLR is $10,000, there would also be a preparer’s fee and it takes six to nine months, on average, to receive a ruling.

Since the tax code does not allow for IRA and employer plan RMDs to be aggregated, IRS cannot grant any kind of waiver and, as the individual now knows, the RMD must still be taken from the plan. Even if he does a rollover of the plan funds to an IRA this year, the tax code requires that the RMD be paid out of the plan before the rollover to the IRA can happen. The tax code also specifies that RMD payments are not eligible for rollover, so he could not later roll over the RMD from the plan to his IRA. Bottom line, he must still take his RMD from his plan.  

 

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