This week's Slott Report Mailbag looks into missed RMDs, IRA transfers, and Testamentary Trusts. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.
I am sure you can help me with this situation.
A person died on November 29, 2015. His Roth IRA was transferred to a Beneficiary Roth in March of 2016. All advisors, as well as the advisor’s software said that no RMD was required for 2016. At the end of 2016 the Beneficiary Roth was being transferred to another investment firm, and due to a glitch in paperwork, the account never got transferred to the new firm by December 31, 2016 (the client was not aware of this). Discussions about RMD’s for other accounts were held with the new advisor, but the Beneficiary Roth account got lost in the shuffle, and no RMD was taken. Both the old and new advisor thought an RMD was not required.
The account balance at 12/31/15 was $50,000. The person was not married, and his mother was the beneficiary. She was 78 years old at the end of 2016. All of this was realized on January 12, 2017.
My questions are:
1) Is an RMD required from the Beneficiary Roth for 2016?
2) Does it make a difference that the Beneficiary Roth was not opened until 2016?
3) If an RMD is required, what would the amount be?
4) If it was required, and since it wasn’t taken in 2016, what are the next steps? From what I understand, we should take the RMD ASAP and fill out the 5329 with the beneficiary’s tax return.
5) What is the best explanation on the 5329, that would get the penalty waived?
1) Yes. RMDs for non-spouse beneficiaries must begin by December 31st of the year following the year of death.
2) None whatsoever.
3) The 2016 RMD amount would be determined by dividing the 12/31/15 value by the beneficiary’s single life expectancy. This is exactly the same calculation that would be applicable to an inherited traditional IRA inherited by the same beneficiary.
4) That is correct. The 5329 can be filed separately from the beneficiary’s tax return though, if you prefer.
5) You need to provide the IRS with evidence of reasonable cause. There really isn’t a “best explanation,” as the reason the RMD was missed is the reason. That said, advisor error or believing that such issues were being handled by an advisor, which sounds like the case here, will likely pass IRS muster.
Thanks for your help. - Melissa
My Self-Directed IRA company will not allow me to have a Testamentary Trust as my Contingent Beneficiary. Is there any reasonable explanation for this? Thank you. - Kevin
I suppose that depends on your definition of “reasonable.” It’s their prerogative as the custodian to determine what beneficiaries are acceptable. They probably don’t feel it makes business sense to deal with the complexities that can arise when a testamentary trust is named as a beneficiary. If you don’t like it, you can vote with your wallet, so to speak, and find another custodian that’s more accommodating to your needs.