[Should I be taking RMDs from an Inherited 457?]

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lot_hawk
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[Should I be taking RMDs from an Inherited 457?]

Post by lot_hawk » Tue Oct 08, 2019 7:54 am

I inherited a Nationwide 457 from my father who died in November 2016. It was worth about 60K. In 2017 it was dividing between siblings. In 2017, a 457 account was created in my name with my share (about 20K). My father was 59 when he died and I was 37 in 2016.

I've been trying to read up on this but I am confused. Am I supposed to be taking RMDs every year? What happens if I didn't? What is the 5 year rule? When does it start? Thank you for the help.

Silk McCue
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Re: [Should I be taking RMDs from an Inherited 457?]

Post by Silk McCue » Tue Oct 08, 2019 8:33 am

Welcome to Bogleheads!

RMDS are required. This article provides a good writeup.

https://finance.zacks.com/can-roll-over ... 11272.html

The 5 year rule is full distribution by the end of the fifth year following the year in which the deceased died.

Given the smallish amount of money here you should certainly consider withdrawing the funds in a tax efficient manner and contributing to a Roth if you have earned income that supports that between now and the end of the 5 year window. (edit for correction)

Cheers
Last edited by Silk McCue on Tue Oct 08, 2019 9:03 am, edited 1 time in total.

mhalley
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Re: [Should I be taking RMDs from an Inherited 457?]

Post by mhalley » Tue Oct 08, 2019 8:34 am

I believe the 5 year rule for inherited ira allows you to delay taking distributions for 5 years, but you must then take the entire amount. Usually the better plan it to stretch the inherited account by taking rmds based in your age.
The five-year rule for certain inherited IRAs
In cases in which the IRA holder hadn't yet started taking required minimum distributions before death -- which is typically required at age 70 1/2 -- beneficiaries have the option to let the inherited IRA assets remain within the account for up to five years after death. At that point, the full amount of the IRA must be withdrawn. This limited delay allows you to do some tax planning, and there can be a real benefit to extending the deadline five years if you believe that your income will drop dramatically and make the tax burden of a traditional IRA withdrawal less onerous.

4. Stretching out an inherited IRA
An even better option for nonspouse beneficiaries involves what's known as a stretch IRA strategy. This method requires that you start taking distributions every year, on an annual basis. How much you take out depends on two things: the value of the account at the beginning of the year, and the life expectancy of the beneficiary as of the death of the original IRA holder. This IRS chart will determine the appropriate life expectancy number.

For instance, if a 47-year-old person inherits an IRA, the appropriate life expectancy factor is 36 years. Therefore, under the stretch IRA rules, the person will need to take out 1/36 of the beginning account balance for the year. The next year, the required minimum distribution will be 1/35 of the updated accounted balance at the beginning of that year. Subsequently, the RMDs will be 1/34, 1/33, and so on. This gives you the maximum time to enjoy IRA-related tax benefits like deferral for traditional IRAs or tax-free income for Roth IRAs.
https://www.fool.com/retirement/iras/20 ... heart.aspx
Failure to take rmds can result in large penalties, but I understand the irs is fairly forgiving when you catch the rmds up and plead ignorance.

HomeStretch
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Re: [Should I be taking RMDs from an Inherited 457?]

Post by HomeStretch » Tue Oct 08, 2019 8:47 am

If you have missed taking RMDs, proactively address it by taking the catchup RMDs and requesting a waiver from the IRS of the 50% penalty. Try searching the topic of missed RMDs in past forum threads that (if I recall correctly) contained good info on addressing the IRS/missed RMDs.

Topic Author
lot_hawk
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Re: [Should I be taking RMDs from an Inherited 457?]

Post by lot_hawk » Tue Oct 08, 2019 10:11 am

Thank you for the replies. I spoke with Nationwide and I think I'm going to take out $7000 a year for the next three years (2019, 2020, and 2021). I will use that money to contribute more to my Roth and TSP accounts. Thanks again for all the advice!

aristotelian
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Re: [Should I be taking RMDs from an Inherited 457?]

Post by aristotelian » Tue Oct 08, 2019 10:25 am

lot_hawk wrote:
Tue Oct 08, 2019 10:11 am
Thank you for the replies. I spoke with Nationwide and I think I'm going to take out $7000 a year for the next three years (2019, 2020, and 2021). I will use that money to contribute more to my Roth and TSP accounts. Thanks again for all the advice!
What is it invested in at Nationwide? You will likely have better options if you transfer it to a discount broker such as Vanguard or Schwab.

Topic Author
lot_hawk
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Re: [Should I be taking RMDs from an Inherited 457?]

Post by lot_hawk » Tue Oct 08, 2019 10:33 am

Nationwide Fixed Account, Fid Contra, and Invsco Gr Inc A . I would rather just have my accounts because the inherited part seems to confuse things. I think it will be easier to contribute to the accounts I have already instead.

HomeStretch
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Re: [Should I be taking RMDs from an Inherited 457?]

Post by HomeStretch » Tue Oct 08, 2019 10:54 am

lot_hawk wrote:
Tue Oct 08, 2019 10:11 am
Thank you for the replies. I spoke with Nationwide and I think I'm going to take out $7000 a year for the next three years (2019, 2020, and 2021). I will use that money to contribute more to my Roth and TSP accounts. Thanks again for all the advice!
Does your plan address any RMDs not taken for 2017-2018 by you or possibly your father for 2016?

Silk McCue
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Re: [Should I be taking RMDs from an Inherited 457?]

Post by Silk McCue » Tue Oct 08, 2019 11:23 am

HomeStretch wrote:
Tue Oct 08, 2019 10:54 am
lot_hawk wrote:
Tue Oct 08, 2019 10:11 am
Thank you for the replies. I spoke with Nationwide and I think I'm going to take out $7000 a year for the next three years (2019, 2020, and 2021). I will use that money to contribute more to my Roth and TSP accounts. Thanks again for all the advice!
Does your plan address any RMDs not taken for 2017-2018 by you or possibly your father for 2016?
They don't need to take RMDs if they are now, by default, on the 5 year plan. Also note, his father was 59 when he passed.
The other option available to nonspousal beneficiaries and spouses electing to be treated as beneficiaries is the five-year rule. Under the five-year rule, the beneficiary must withdraw the entire interest from the IRA by December 31 of the year containing the fifth anniversary of the decedent’s death [IRC section 401(a)(9)(B)(ii); Treasury Regulations section 1.401(A-2)]. The beneficiary is generally free to withdraw any amount before the five-year date, or to wait until the fifth year to withdraw the entire interest [Treasury Regulations section 1.401(a)(9)-3(A-2)].
https://www.cpajournal.com/2018/06/13/u ... ira-rules/

Cheers

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ThePrune
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Re: [Should I be taking RMDs from an Inherited 457?]

Post by ThePrune » Tue Oct 08, 2019 12:06 pm

There have been several confusing (confused!) statements made in this posting stream about RMDs as they apply to inherited 457 accounts. I'd like to cite the relevant Treasury regulations on this topic, so that all readers will unambiguously know the facts.

457 plans are governed (not surprisingly) by section 457 of the Internal Revenue Code (IRC). In IRC section 457(d)(2) it is specified that required distributions for such accounts are governed by IRC section 401(a)(9) and associated Department of Treasury Regulations. This is the section of the IRC that applies to profit sharing plans, stock plans and CODA plans (such as 401k's). Trying to guess at the RMD rules that apply to 457 plans by examining rules that apply IRA's (section 408 of the IRC) is simply incorrect.

The Department of Treasury issued regulation 1.401.(a)(9)-3 " Death before required beginning date" - to clarify how RMD's for beneficiaries will be handled in the case of an account owner who died before April 1 of the year after they achieve age 70 1/2. This is the situation that the original poster is describing.

The Treasury regulations actually allow the 457 Plan sponsor (the deceased's employer) to specify one of two methods for beneficiary RMDS, both of which have been mentioned in this posting stream.
(A) 5 year Rule
(B) Life expectancy Rule

If the 457 Plan specifies just one of these rules, then the beneficiary has no choice but to follow that rule. Thus if the plan document specifies that the beneficiary will distribute using the Life Expectancy rule, then the original poster has failed to take RMDs for 2017 and 2018 and would be subject to the onerous 50% penalty. But they can apply to the IRS for forgiveness and might just receive it.

If the 457 plan document specifies that the beneficiary will distribute using the 5 year rule, then everything is fine. As long as all funds are taken into taxable income by the end of 2021 (end of 5th year after owner's death), the IRS will be satisfied.

Surprisingly, the Treasury Regulations allow the 457 plan document to even allow both rules, but with the provision that the beneficiary positively and irrevocably elect one by these rules for use by (1) the end of the year after death if Life expectancy rule is elected, or (2) the end of the 5 year period if the 5 year rule is elected. So for the original poster, if the 457 plan document allowed such a choice, then they are fine. They have indirectly and irrevocably elected the 5 year rule and not have missed any RMDs to this point.

The final case covered in the cited Treasury Regulation 1.401(a)(9) - 3 is when the plan document doesn't specify the RMD method. In this case if the original poster was a named (designated) beneficiary in the original 457 plan, then they MUST use the life expectancy rule; no choice is allowed. If this is the OP's case, they have missed RMDs for 2017 and 2018, with potential 50% penalties as earlier cited.

If the OP was NOT a named (designated) beneficiary in the original 457 plan, then they MUST use the 5 year rule; no choice is allowed. If this is the OP's case, there are no missed RMDs at this point in time.
Investment skill is often just luck in sheep's clothing.

Topic Author
lot_hawk
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Re: [Should I be taking RMDs from an Inherited 457?]

Post by lot_hawk » Wed Oct 09, 2019 8:18 am

Thank you for all the information. It is very helpful. I'm understanding it a little better now. Right now I have:

FCNTX 53%
ACGIX 26%
Nationwide Fixed Account (3.5%) 21%

I want to change to:

FCNTX 25%
FIGTX 54%
Nationwide Fixed Account 21%

I think this will be better for the next three years. What fees should I look for when I switch accounts? What should I ask the customer service representative about fees?

Spirit Rider
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Re: [Should I be taking RMDs from an Inherited 457?]

Post by Spirit Rider » Wed Oct 09, 2019 9:22 am

You have not clarified the 457b plan beneficiary distribution options and selection you might have made or the plan defaulted to. A 457b plan can have offer the 5-year rule and/or lifetime distribution options. They can offer only one or the other, or a choice. If if is the latter, they can default to one or the other. What plan distribution option applies to your inherited 457b account?

The 5-year rule requires no RMDs, but the account must be completely distributed by 12/31 of the fifth year after the decedent's death. This means you have to fully distribute the account by 12/2021.

The lifetime distribution option requires RMDs starting by 12/31 of the year following the decedent's death. This means if you are subject to lifetime RMDs you have failed to take RMDs for 2017 and 2018. There is a 50% penalty for failure to take RMDs, but there is a waiver for "reasonable cause".

If this is the case, you must immediately withdraw the missed RMDs, file Form 5329 requesting a waiver and provide proof the missed RMDs have been distributed. Follow the Form 5329 instructions for requesting the waiver precisely, include the proof of missed RMD distributions and include a statement that you were not aware the RMDs we're require. The IRS routinely grants the waiver.

If this is a governmental 457b. You could have in 2017 and can still do a direct rollover to an inherited IRA now. That will usually result in more and less costly investment options.

The distribution status will remain the same. The 5- year rule or lifetime distributions must remain the same. If you had done a direct rollover to an inherited IRA by 12/31/17. You could have elected lifetime distributions in the IRA even if the 457b plan didn't allow them.

It is critical that you determine the distribution type and take action if there are missed RMDs!

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