Minimum Required Distribution from Deceased Person's IRA

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Minimum Required Distribution from Deceased Person's IRA

Postby willardx » Tue Jan 24, 2012 11:53 am

I have a sensitive question, not sure how prevalent it is, so I would appreciate any feedback:

1. My father-in-law (FIL) set up to take his MRD in late December, as calculated by Vanguard. My FIL also had taxable accounts to receive the MRD.
2. FIL passed away last April, 2011.
3. Upon being informed of his passing, Vanguard cancelled the MRD transfers of my FIL, as per VG policy.
4. I have been working with VG to transfer all funds into new accounts, including moving the IRA funds to 2 beneficiaries, which was taking a long time.
5. 2011 ends without my FIL taking his MRD (or any beneficiary doing the same).
6. In January, 2012, our assigned VG Beneficiaries rep tells us we needed to take FIL's MRD, and there's a 50% penalty that the IRS levies, and maybe it can be abated.
7. I'm dumbstruck.

I'm sure it happens a lot that family/heirs miss taking the MRD on behalf of the decedent, so first my question is how likely is it that the IRS will abate the penalty? I have told our VG rep that this is now the highest priority and I would like the MRD to take place before we reach February to show the IRS we want to abide by the distribution rules.

But my big question is why did VG not tell us of this looming MRD before 2011 ended? I have read a textbook on IRAs (Natalie Choate?) and she cites a regulation that requires IRA providers like VG to inform clients of the MRD requirements. It's also clear that the penalty falls on the payee (nonpayee), and the only penalty on VG would be an extreme one--a prohibition on offering IRAs at all (I'm sure that is not going to happen).

Our family has been very pleased with VG as a whole, and I really don't think we'd leave over this, but it is very disappointing that we were not timely alerted to this. Am I out of line? And is it all a moot point because the IRS will abate the penalty? It's a sizable penalty (five figures on a six-figure MRD), so it's real dollars to us.

Thanks for any input.
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Re: Minimum Required Distribution from Deceased Person's IRA

Postby livesoft » Tue Jan 24, 2012 11:59 am

Take the RMD this week. Then communicate with the IRS. I think they will waive the penalty, so relax. Others will chime in who have had the same problem. I am only responding to get you to start relaxing now and to lower your blood pressure.
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Re: Minimum Required Distribution from Deceased Person's IRA

Postby sscritic » Tue Jan 24, 2012 12:05 pm

I like to ask the IRS tax questions.

Can the penalty for not taking the full RMD be waived?

Yes, the penalty may be waived if the account owner establishes that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. In order to qualify for this relief, you must file Form 5329 and attach a letter of explanation. See the instructions to Form 5329 for all the rules on how to apply for this waiver.
http://www.irs.gov/retirement/article/0 ... ,00.html#9

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Re: Minimum Required Distribution from Deceased Person's IRA

Postby Alan S. » Tue Jan 24, 2012 2:56 pm

This issue is a very common post on various IRA forums.
While you will very likely get the penalty waiver, it helps to include a copy of the IRA distribution statement showing the distribution of the 2011 RMD amount. Note that there is no formal requirement that beneficiaries take this RMD in proportion to the amount inherited. If one beneficiary needs the money anyway, that beneficiary can distribute the entire 2011 RMD and the other beneficiary can leave their separate account alone. This flexibility ends with the year of death RMD and in subsequent years each beneficiary must individually take out their own inherited IRA RMD. However, this flexibility does not apply to Form 8606 unrecovered basis at the time of death, as each beneficiary inherits their proportionate share of the basis and files an 8606 to report it. The decedent's RMD can be distributed either before or after the separate accounts are established. What you do not want is uncertainty as to which beneficiary took the RMD or how much each is to take out. The RMD is income taxable to each beneficiary in the year and amount received.

The 5329 goes with the beneficiary tax return, NOT the decedent's. The reason is that an IRA owner that passes before the end of any year is not responsible for taking out that year's RMD, the beneficiaries are and therefore the beneficiaries that eventually complete that RMD file the 5329. Strangely enough, many IRA owners pass with several years of missing RMDs, but the tax code only make the beneficiaries responsible for the year of death RMD. It is not clear if the IRS has any policy for delinquent RMDs for years prior to the year of death.

With respect to Vanguard, they will meet the minimum custodian requirements of the IRS (Form 5498) with respect to RMDs in general, but there are so many possible scenarios with respect to beneficiary RMDs, there are no formal IRS requirements for notifying beneficiaries what all their options and requirements are. For example, for all Vanguard knows the decedent might have sastisfied the RMD from other IRAs not held by Vanguard. It is probably disappointing that a firm large enough to support a "beneficiaries rep" as you put it would not alert you to the generaly requirement even if done informally or verbally at the time the beneficiary separate accounts are established.
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Re: Minimum Required Distribution from Deceased Person's IRA

Postby willardx » Tue Jan 24, 2012 5:39 pm

Thank you Alan for the detailed post, and for the other responses that tell me not to worry (I can't help it). We are waiting for VG to send us an affidavit to sign, specifying how to distribute the IRA assets, so the ball is in their court. As for whether my FIL had taken other MRDs (or RMDs), I think VG has a higher standard since they cancelled the MRD transfers, so there was actual knowledge of the required distribution.

I'll just hope for the best. *deep breath*
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Re: Minimum Required Distribution from Deceased Person's IRA

Postby ThePrune » Tue Jan 24, 2012 10:13 pm

willardx wrote:I have a sensitive question, not sure how prevalent it is, so I would appreciate any feedback:

4. I have been working with VG to transfer all funds into new accounts, including moving the IRA funds to 2 beneficiaries, which was taking a long time.

Just want to ask a few questions confirming the proper naming of these new beneficiary accounts (assuming you wish to "stretch" MRD's using new IRAs).

If a spouse is one of the beneficiaries, then IRA funds can be transferred to a new IRA in the spouse's name. This might not be the smartest move from a tax planning perspective, but it is allowed. The IRS will not treat this as a withdrawal.

But if any other type of IRA beneficiary (i.e. a non-spouse beneficiary) transfers inherited IRA funds into an account in their name, the IRS will ultimately treat it as a complete withdrawal and expect all taxes to be paid for the year of transfer. Sorry, but that's just the way it is :cry:

Instead, non-spouse beneficiaries should transfer IRA funds into an account titled roughly as follows: Deceased Person IRA (deceased Month, Day, Year), F/B/O/, Recipient Name, Beneficiary.

Say the deceased was named Roberta Smith, she died on May 12, 2003, and the beneficiary is named James Smith (her son). The new IRA should be titled: Roberta Smith IRA (deceased May 12, 2003) F/B/O/, James Smith, Beneficiary.

So while you'll dealing with this messed up MRD, also make sure that the new IRA accounts got titled correctly!

My "go to" reference person for all things involving IRA inheritances is Ed Slott. If you want to explore this topic more, get a copy of his book, "The Retirement Savings Time Bomb... and How to Defuse It".
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Re: Minimum Required Distribution from Deceased Person's IRA

Postby LadyGeek » Tue Jan 24, 2012 10:22 pm

The wiki has some background info: Inheriting an IRA
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Re: Minimum Required Distribution from Deceased Person's IRA

Postby livesoft » Tue Jan 24, 2012 10:33 pm

And don't forget to designate NEW beneficiaries to the inherited IRA.
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Re: Minimum Required Distribution from Deceased Person's IRA

Postby tuckeverlasting » Thu Jan 26, 2012 5:50 pm

I had a similar situation with inheriting an IRA at VG in 2011. In my case, VG did notify me of the need to take the decedent's 2011 RMD. There were also 2 beneficiaries and a similar date of death. The transfer and IRA split was quick and easy except for VG sending the wrong forms the first time. Maybe it just depends on who is helping you.
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Re: Minimum Required Distribution from Deceased Person's IRA

Postby cindalou42 » Wed Feb 01, 2012 3:56 pm

This problem may be more prevalent than the industry would like to recognize. I have just encountered the same issue with my mother's passing in September. A representative of a non-Vanguard institution specifically told me NOT to take the RMD when I inquired about it. I took care of other business throughout the holidays, then found out, after Jan. 1, that I should have made the withdrawal. (Found out on the Internet, of course....) The attorney who is handling the probate also failed to mention the RMD issue, despite the account being listed on the estate inventory. Very disappointing. Perhaps this is why the IRS allows most waivers: they know that too many people in the business don't know how to handle this correctly.

I appreciate the responses on this forum.
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Re: Minimum Required Distribution from Deceased Person's IRA

Postby Alan S. » Wed Feb 01, 2012 6:22 pm

You are correct.
Many who should know better want to have the RMD distributed to the estate, and that would only be correct if the estate was named as beneficiary (big mistake), or became the default beneficiary when there was no other beneficiary named.

The IRS is sympathetic to most penalty waiver requests based on death or severe illness of close family members, so they typically waive the penalty. The fact that the excess accumulation penalty is so severe (50% of the missed RMD) is another reason, so if the beneficiary takes out the RMD within any reasonable period of time and self reports using Form 5329, the IRS will almost always waive the penalty.

Of course, this also means that the beneficiary will have the decedent RMD and their own beneficiary RMD bunched into the same tax year, but nothing can be done about that.
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Re: Minimum Required Distribution from Deceased Person's IRA

Postby MarkNYC » Wed Feb 01, 2012 10:50 pm

willardx wrote:
1. My father-in-law (FIL) set up to take his MRD in late December
2. FIL passed away last April, 2011.

5. 2011 ends without my FIL taking his MRD (or any beneficiary doing the same).

Many IRA owners like to schedule their RMD for late in December, presumably to obtain some extra days or weeks of tax-deferred compounding before withdrawing the money. I think it's a bad idea, for two reasons. First, believe it or not, IRA custodians sometimes have a paperwork or administrative foul-up and the RMD does not take place right on schedule. If the foul-up occurs late in December, there may not be enough time to get the error corrected by December 31st. Second, if the IRA owner dies in November or early December, the survivors/beneficiaries may understandably be preoccupied with various personal matters that result in the RMD issue not to be addressed until after the end of the year. In both situations the taxpayer is facing a 50% penalty, and even though a penalty waiver might be obtained, there is no guarantee of that and the anxiety of dealing with the penalty can be significant. I think it makes more sense to schedule the RMD much earlier than late December.

This doesn't help the OP,and his facts were different with the death in April and the questionable actions of Vanguard, but others may want to consider if a minimal amount of extra tax-deferral is worth the risk of potentially having to deal ( or their beneficiary having to deal) with a 50% penalty situation.
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Re: Minimum Required Distribution from Deceased Person's IRA

Postby tuckeverlasting » Wed Feb 01, 2012 11:05 pm

I guess the lesson is, don't depend on others to be looking out for your interests! In my case VG did tell me of the need to take the RMD, during the process of ownership transfer. However I already knew I needed to take it as I had made sure to inform myself about inherited IRA's ahead of time. No one else is going to care about your affairs as much as you do. :|

Good suggestion, MarkNYC, about not taking the RMD in late December.
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