Inherited IRA/401K & Missed RMDs

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duffman
Posts: 2
Joined: Sat Jul 25, 2020 1:17 pm

Inherited IRA/401K & Missed RMDs

Post by duffman »

Hello Bogleheads! I just want to thank everyone in advance for the enormous wealth of knowledge contained in the wiki and on these forums! I finally created an account to post, but I have been lurking for many months trying to both improve my financial literacy and to help my DW handle a mess of an estate she inherited. I have found a lot of answers and good advice in the wiki and other posts, but I want to make sure I am interpreting everything correctly since I haven’t found anything that describes the exact set of circumstances as DW’s situation.

DW’s (29yo) parents both passed away at relatively young ages, FIL in 2004 @ 50yo and MIL in 2014 @ 61yo. Long story short, both estates are a mess and are still open, but hopefully being wrapped up soon. As part of the estate, two Vanguard IRAs and one Vanguard/Fidelity 401K were located. All three accounts were originally my FIL’s and transferred to my MIL as inherited spousal accounts after his death. My DW and her brother were both listed as 50% beneficiaries of the three accounts. The two IRAs were split in half and my DW’s portion rolled over into a single inherited IRA at Vanguard in late 2019. A single RMD was taken for the year 2019 for just the IRA balance while we worked to get information and control of the 401K. While we were going through the process of claiming the 401K the employer changed their plan administrators from Vanguard to Fidelity and we had to start that process from scratch. The 401K was finally split in half and rolled over into DW’s existing Vanguard inherited IRA in 2020. The total value of the three accounts was about 500k (250k to each beneficiary). We were able to get all the end of year balances for the IRAs going back to 2014. The 401K balances have proven to be a huge pain. Fidelity only held the records for 2020 and all prior records still lived at Vanguard. We have been going in circles with Vanguard’s DC folks for weeks and spent countless hours on the phone trying to get information from them. We finally were able to get verbal confirmation on the year end balances, but are still waiting on actual statements. We are waiting for the statements to come through before we take any action, since our trust in Vanguard’s CSRs is all but gone, but I’m trying to get all of our ducks in a row now. I am only directly helping with DW’s portion, but will pass along as much info as I can to my BIL so he can make his own decisions on his portions.

I have read through the wiki, a bunch of old topics/posts, IRS 590-B, and everything else I can seem to find online. I was completely clueless about all of this when I first started, so I may be completely wrong about some of these assumptions. I am hoping the Boglehead community can offer some advice or corrections on my below thoughts/plan.
  • We would like to treat the inherited inherited spousal IRA as a stretch, taking just the RMDs for the foreseeable future.
  • My understanding is the 401K should not be affected by the Secure Act even though it wasn’t transferred over until 2020, the true date of inheritance was the MIL’s date of death in 2014?
  • Both MIL and FIL died prior to their required beginning date so I think RMDs should be based on the beneficiary’s (DW) life expectancy according to Table 1 in IRS 590-B.
  • DW was 24yo at the time of her mother's death and turned 25yo in the year after death. The 25 divisor of 58.2 would be used for the first RMD in 2015. Each year thereafter would be 1 less (57.2, 56.2, etc…)
  • Since accounts were not properly divided in the first year, both DW and her brother are stuck using DW’s life expectancy since she is older.
  • RMDs are owed going back to 2015. Amount would be based on the previous year’s end balance divided by 2 since DW and her brother are each 50% beneficiaries.
  • The past due RMDs will be taken in 2020, however a specific RMD for 2020 is not required because of the Cares Act (she will elect to skip).
  • Since RMDs are delinquent, there is a 50% penalty per RMD owed to the IRS.
  • An appeal should be submitted for the penalty by writing a letter to the IRS explaining the situation, advising that it has been rectified, and by completing IRS Form 5329 for years 2015-2019.
  • Form 5329 Part IX to be completed with a write in of RC and the amount missed for the given year in the margin of line 54 with $0 on line 54
Are there any penalties that we must worry about when it comes to state taxes/laws? We would have Vanguard withhold fed and state taxes from the missed RMDs. Should we request multiple RMDs, one for each year, or would one lump sum work? Is there anything else that I may have missed, or advice that you can offer so we do not mess this thing up worse than it already is?

We really appreciate any help or insights you can provide. :sharebeer

The next hurdle is to get all of DW’s funds into a proper AA, but one thing at a time.
Silk McCue
Posts: 4808
Joined: Thu Feb 25, 2016 7:11 pm

Re: Inherited IRA/401K & Missed RMDs

Post by Silk McCue »

Welcome to Bogleheads!

Sorry for the mess. I am posting to draw the attention of Alan S so that he might provide you with feedback when he is notified that he was quoted here.
Alan S. wrote: Wed Apr 03, 2019 11:03 pm

Cheers
sport
Posts: 9538
Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Inherited IRA/401K & Missed RMDs

Post by sport »

You should be aware that Vanguard will withhold taxes for some states, but not others. I know this because they will not withhold for my state. So, if you plan for them to withhold for your state, you should verify that they will.
MJS
Posts: 580
Joined: Sat Aug 05, 2017 10:55 pm

Re: Inherited IRA/401K & Missed RMDs

Post by MJS »

duffman wrote: Tue Jul 28, 2020 1:03 am
Are there any penalties that we must worry about when it comes to state taxes/laws? We would have Vanguard withhold fed and state taxes from the missed RMDs. Should we request multiple RMDs, one for each year, or would one lump sum work? Is there anything else that I may have missed, or advice that you can offer so we do not mess this thing up worse than it already is?
Please tell us which state(s) since laws vary.

Note that the IRS (once they have a chance to get around to your case, because they are extremely overworked & understaffed right now) will provide answers and numbers for many of your questions.
Alan S.
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Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Inherited IRA/401K & Missed RMDs

Post by Alan S. »

Congratulations, you have nailed all these complex issues. That's very impressive.

Secure Act does not apply during DW's lifetime. The IRS will waive the 50% penalties as long as the 4 lines of the 5329 for each year are completed correctly. Make sure her brother knows that he must also apply DW's divisor each year. If the proposed new IRS RMD tables are approved for 2021 (or whenever), these RMD divisors will have to be reset based on the new correct divisor for 2015, and the 1.0 reductions applied to arrive at the new 2021 divisor. The RMDs you are taking now are not affected. You will have to monitor that situation with respect to future RMDs.

The delinquent RMDs can be taken in a lump sum, but you could split them up by year if you wish and if VG will cooperate. It is somewhat surprising that the 401k plan did not concern itself with the missed RMDs before approving the direct rollover to the inherited IRA since that is an EPCRS violation. But making up those 401k RMDs from the IRA is the only option at this point and should not result in problems for her. Default withholding for an IRA distribution is 10%, but you can increase that rate to whatever % you wish to conform to your total joint filing situation for 2020.

See sport's post regarding state withholding.
Topic Author
duffman
Posts: 2
Joined: Sat Jul 25, 2020 1:17 pm

Re: Inherited IRA/401K & Missed RMDs

Post by duffman »

sport wrote: Tue Jul 28, 2020 11:32 am You should be aware that Vanguard will withhold taxes for some states, but not others. I know this because they will not withhold for my state. So, if you plan for them to withhold for your state, you should verify that they will.
We are in New Jersey. I believe they do withhold for NJ as when we took the one year's distribution for the IRAs only, they withheld both State and Federal taxes for us.
Alan S. wrote: Tue Jul 28, 2020 11:48 am Congratulations, you have nailed all these complex issues. That's very impressive.

Secure Act does not apply during DW's lifetime. The IRS will waive the 50% penalties as long as the 4 lines of the 5329 for each year are completed correctly. Make sure her brother knows that he must also apply DW's divisor each year. If the proposed new IRS RMD tables are approved for 2021 (or whenever), these RMD divisors will have to be reset based on the new correct divisor for 2015, and the 1.0 reductions applied to arrive at the new 2021 divisor. The RMDs you are taking now are not affected. You will have to monitor that situation with respect to future RMDs.

The delinquent RMDs can be taken in a lump sum, but you could split them up by year if you wish and if VG will cooperate. It is somewhat surprising that the 401k plan did not concern itself with the missed RMDs before approving the direct rollover to the inherited IRA since that is an EPCRS violation. But making up those 401k RMDs from the IRA is the only option at this point and should not result in problems for her. Default withholding for an IRA distribution is 10%, but you can increase that rate to whatever % you wish to conform to your total joint filing situation for 2020.

See sport's post regarding state withholding.
Thanks, the only reason I was even able to get this close was due to this website! When I first started, I was terrified since DW missed the 1st year deadline and the 5yr deadline, and was convinced she would owe a 50% penalty on the entire amount. DW inherited all of this prior to us even meeting. It wasn't until after things got more serious between us and we started to having more financial talks, did I realize what a mess things were. Now that we are newly married I recognized that it was going to become my problem once we started doing taxes MFJ, and have been trying to help her all I can and push her to get it wrapped up.

Once I am able to finalize all of the year end balances I plan on passing it all to my BIL along with letting him know the correct divisor to use. I saw that a new IRS table may be forthcoming and have been trying to follow that so we can respond accordingly once we are all caught up.

We will likely opt for a liberal amount of taxes to be withheld just to be safe (DW did 20% fed last time) since we just got married this year, so 2020 will be our first time MFJ. Between unanticipated fluctuations in pay at work for both of us due to Covid, just recently buying a house, and more money coming to DW from the estates, I can't even begin to guess what tax season will look like for us in 2020. We will likely visit a CPA to make sure everything is straightened out for the year.

At this point in the estate process I'm not surprised these financial institutions did something they probably shouldn't have. We have been hit with all kinds of mistakes and curve-balls with other accounts at other major national and regional banks, assets sent to unclaimed funds, missing accounts, you name it. It seems like my MIL did not believe in "KISS", and instead insisted on having multiple accounts at a bunch of different banks, using different combinations of her maiden and married names. The experience has led me to try to better educate myself on a lot of these matters after having to work through inadequately trained/prepared CSRs. I also have learned the value of leaving a nice tidy package for any decedents/beneficiaries.

Thank you all for taking the time to read through this and lend your advice. We still have more hoops to jump through with other estate matters, but they seem to be much more straight forward once we jump through all of the hoops and red tape. Being able to finally get through the IRA/401K portion feels like a great weight lifted has been lifted.
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