RMD from Inherited IRA

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btenny
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RMD from Inherited IRA

Post by btenny » Mon Jul 09, 2018 6:44 pm

My wife has a small IRA she inherited from her Dad in 2013. He had been withdrawing RMDs from it and paying taxes for years. We have it invested as a Inherited IRA and have been taking RMDs each year according to what I read in Pub 590. Previously I have done the calculations to determine the necessary RMD and taken them each year. I did not receive a form or a letter from the investment bank specifying the amount to be withdrawn.

Then I called the bank this year to make the RMD. They told me we needed to withdraw $2530.46. When I do the RMD calculations for my wife at age 72 I get $2383.54. The amount they are telling me is larger than I calculate. They seem to be using a divisor of 14.6. I get 15.5 from Table 1.

Any one know who is right or something I am doing wrong? Suggestions?

Alan S.
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Re: RMD from Inherited IRA

Post by Alan S. » Mon Jul 09, 2018 7:07 pm

14.6 is the correct divisor for 2018. After the first beneficiary RMD in 2014 using the 18.6 divisor, Table I is never consulted again. Instead, the initial divisor is to be reduced by 1.0 for each successive year. That would result in 14.6 being the correct divisor for 2018.

Therefore, there has been a small shortfall in the RMD for 2015-2017 which needs to be made up. Then a 5329 should be filed for those years requesting the penalty waiver. The 5329 can be filed by itself and no 1040 X is needed. The IRS will normally waive the penalty if the 5329 forms are filed correctly. See the 5329 Inst since lines 54 and 55 are not intuitive.

btenny
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Re: RMD from Inherited IRA

Post by btenny » Mon Jul 09, 2018 8:05 pm

I see the issue you are talking about. That subtract 1 is buried deep in the 590 publication. That one line changes everything. I guess I have not done it right for a while.

But I also looked back at 2017 taxes and my error is about $70 under withdrawal for this inherited RMD. (my guess) So this error requires me to fill out form 5329 for 2017. But when I read that form and the instruction it tells me to put the penalty and tax on Form 1040. Likewise I guess I have a small error for 2015 and 2016.

How do I not file a 1040X to pay some extra tax or ask for a waiver of this stuff. Please advise. Thanks In advance.

trueblueky
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Re: RMD from Inherited IRA

Post by trueblueky » Mon Jul 09, 2018 8:54 pm

btenny wrote:
Mon Jul 09, 2018 8:05 pm
I see the issue you are talking about. That subtract 1 is buried deep in the 590 publication. That one line changes everything. I guess I have not done it right for a while.

But I also looked back at 2017 taxes and my error is about $70 under withdrawal for this inherited RMD. (my guess) So this error requires me to fill out form 5329 for 2017. But when I read that form and the instruction it tells me to put the penalty and tax on Form 1040. Likewise I guess I have a small error for 2015 and 2016.

How do I not file a 1040X to pay some extra tax or ask for a waiver of this stuff. Please advise. Thanks In advance.
Complete a Form 5329 for each year when the RMD was too small. You only need the personal heading info and the four lines of Part IX. Submit them with a letter explaining the circumstances and asking for a waiver.

Line 52, 53, 54 enter the amounts. Beside line 54 write RC and the amount you want waived in parentheses on the dotted line. Write 0 on Line 55.

https://www.irs.gov/forms-pubs-search?search=5329 links to the form and the instructions. You will need a different form for each tax year. I would mail it all together.

IRS will want to know that you have taken action to fix this, so you will need to take the amounts not taken plus the 2018 RMD. Do that before you mail the forms and state that in your request for waiver.

btenny
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Re: RMD from Inherited IRA

Post by btenny » Tue Jul 10, 2018 1:16 pm

True. Thanks a lot. What does RC mean for us poor non tax people?

spectec
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Re: RMD from Inherited IRA

Post by spectec » Tue Jul 10, 2018 1:26 pm

RC means "Reasonable Cause". It's IRS-speak, telling them you believe your have Reasonable Cause under their guidelines for a waiver of the additional tax on the excess accumulation (technically it isn't a penalty, it's an "additional tax"). It also alerts them to look for the excellent, bullet-proof explanation you are going to attach to the form.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers

btenny
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Re: RMD from Inherited IRA

Post by btenny » Wed Jul 11, 2018 10:49 am

Ok. So I did the revised RMD calculations and I found I need to withdraw $126 more from the inherited IRA for three years of errors. :oops: :oops: It took me all afternoon to fill out three sets of forms. Now I have to take the extra $126 out of the IRA and write a letter. More paperwork!!!

But I have some questions first. Form 5329 say put the penalty money on the form 1040, line 59. I understand that will be zero if they accept my letter (that I still have to write). What about the tax on the extra $126 of income. I probably will get a 1099 showing this extra income next spring. So I will have to add that $126 to my 2018 tax return. Do I include copies of the three form 5329 with my 2018 tax return? The letter?

Sorry for all the hand holding but this seems like a lot of IRS [(removed) --admin LadyGeek] for such a small number...

Thanks again.

trueblueky
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Re: RMD from Inherited IRA

Post by trueblueky » Wed Jul 11, 2018 11:48 am

Don't include those forms with your 1040 next year; the IRS will already have them, and we don't want to confuse things by having it entered twice.

You should receive a 1099 with the $126 plus your normal RMD from the inherited IRA. The 1099 will not show those as separate items. These will go on your tax return as income from an IRA distribution.

Your letter is very likely to be accepted. Until you receive a reply, proceed as if the additional tax has been waived.

I would make the letter factual. This is not the time to say the instructions are confusing, waste of time, [(removed) --admin LadyGeek], etc.

Letter
When FIL (name) died (date), DW received an inherited IRA. In three subsequent years, we used the divisor for an individual per the tables to compute the RMD, instead of subtracting one from the 2014 divisor each year. I apologize for misunderstanding the instructions. This mistake resulted in a total under-withdrawal of $126 as shown on the enclosed 5329s for tax years 2015, 2016 and 2017.

On learning of the mistaken amounts, we withdrew $126 from the IRA on (date) to become current. Request a waiver for reasonable cause.

NotWhoYouThink
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Re: RMD from Inherited IRA

Post by NotWhoYouThink » Wed Jul 11, 2018 12:32 pm

You are a better citizen than I am. I would withdraw the extra $126, pay the ordinary income tax on that, and be done with it. If never audited I've saved myself and some IRS employee the time and trouble of wading through the paperwork, and if audited we could do the paperwork then.

MarkNYC
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Re: RMD from Inherited IRA

Post by MarkNYC » Wed Jul 11, 2018 12:54 pm

Alan S. wrote:
Mon Jul 09, 2018 7:07 pm
14.6 is the correct divisor for 2018. ..Therefore, there has been a small shortfall in the RMD for 2015-2017 which needs to be made up. Then a 5329 should be filed for those years requesting the penalty waiver. The 5329 can be filed by itself and no 1040 X is needed.
Alan,

The OP has indicated an average RMD shortfall of $42 for each of the 3 years, meaning a potential penalty of $21 for each year.

Understanding there is no statute of limitations on unfiled Form 5329, is there a minimum potential penalty amount below which you would consider the filing of a delinquent stand-alone Form 5329 to be impractical, or not worth the time and effort and potential IRS correspondence?

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munemaker
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Re: RMD from Inherited IRA

Post by munemaker » Wed Jul 11, 2018 3:14 pm

MarkNYC wrote:
Wed Jul 11, 2018 12:54 pm
Alan S. wrote:
Mon Jul 09, 2018 7:07 pm
14.6 is the correct divisor for 2018. ..Therefore, there has been a small shortfall in the RMD for 2015-2017 which needs to be made up. Then a 5329 should be filed for those years requesting the penalty waiver. The 5329 can be filed by itself and no 1040 X is needed.
Alan,

The OP has indicated an average RMD shortfall of $42 for each of the 3 years, meaning a potential penalty of $21 for each year.

Understanding there is no statute of limitations on unfiled Form 5329, is there a minimum potential penalty amount below which you would consider the filing of a delinquent stand-alone Form 5329 to be impractical, or not worth the time and effort and potential IRS correspondence?
Personally I would let that sleeping dog lie.

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BL
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Re: RMD from Inherited IRA

Post by BL » Wed Jul 11, 2018 3:42 pm

I didn't realize folks distributed these amounts to the penny! I generally round up to the nearest 500 or 1000, just to keep it simple and maybe cover minor errors.

Alan S.
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Location: Prescott, AZ

Re: RMD from Inherited IRA

Post by Alan S. » Wed Jul 11, 2018 3:50 pm

MarkNYC wrote:
Wed Jul 11, 2018 12:54 pm
Alan S. wrote:
Mon Jul 09, 2018 7:07 pm
14.6 is the correct divisor for 2018. ..Therefore, there has been a small shortfall in the RMD for 2015-2017 which needs to be made up. Then a 5329 should be filed for those years requesting the penalty waiver. The 5329 can be filed by itself and no 1040 X is needed.
Alan,

The OP has indicated an average RMD shortfall of $42 for each of the 3 years, meaning a potential penalty of $21 for each year.

Understanding there is no statute of limitations on unfiled Form 5329, is there a minimum potential penalty amount below which you would consider the filing of a delinquent stand-alone Form 5329 to be impractical, or not worth the time and effort and potential IRS correspondence?

Mark,

Given the IRS' lack of effective oversight and control over inherited IRA RMDs, I think that whatever potential penalty and interest amount for RMD shortfalls that justify not filing the 5329 would be at least double the amount for OWNED IRA RMD shortfalls where there is at least some oversight. As you know, the IRS has stated several times in the last two decades that they intend to upgrade RMD compliance, but have done nothing to date, and even if the IRS did some audits and installed a system to do so, it probably would be on a year forward basis. Or perhaps non spouse beneficiaries eventually face a modified 5 year rule following Congressional legislation, and this would be easier to monitor. Certainly, the potential penalty in this case is not worth worrying about.


That said, the actual completion and mailing time for the 5329 should be modest. Most of the time is typically spent on determining what the RMD should actually have been, what the year end balance was for several years etc. The 5329 is not much work, only 4 lines, although lines 54 and 55 are not intuitive.

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