Wednesday, August 11, 2010

What To Do When Beneficiary Hasn't Taken RMDs

So here’s the scenario…You inherited an IRA from someone other than your spouse and no one told you that you had to take RMDs from that inherited account until now. How do you fix this situation?

First of all, don’t ignore the problem! There’s a 50% penalty on all required distributions (RMDs) that you do not take. Ignoring the problem just means that you owe IRS more money.

You should immediately contact the inherited IRA custodian and ask them if their custodial agreement defaults to a stretch option for beneficiaries or if it requires a full payout in five years. If it requires the latter option, then the account must be emptied by the end of the 5th year after the account owner’s death. You will only owe the 50% penalty if that five year date has come and gone. But if it has passed, then you will owe the penalty on the entire balance that was in the account as of year end of that 5th year.

For inherited IRAs that allow stretch distributions, you will need to go back and calculate all the distributions you missed. You will need the prior year-end account balances for each year you had to take a distribution. That balance gets divided by your life expectancy factor to get the amount of the RMD for the year. Each missed distribution must be taken from the inherited account. A word of caution here - distributions prior to 2002 must be calculated using the rules (and life expectancies) that were in effect at that time, not the current rules.

Form 5329 must be filed for each year you missed a distribution whether they are stretch distributions or taken under the 5-year rule. This is where you report the 50% penalty. The form can be filed as a stand-alone form. You can also request IRS to waive the penalty for good cause by simply including documentation with your tax return and/or form 5329, explaining why you missed the distributions and that since discovering the mistake, corrective action has been taken.

It is always a good idea to get some professional help with these calculations and forms. Don’t go it alone. You can find a list of Ed Slott trained advisors on our website,

By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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