At my main site, JoeTaxpayer.com, the article that has attracted the most comments and questions is Inheriting or Bequeathing an IRA. The rules are tough enough to understand that I frequently get a question after the fact. That is, after a mistake was made. On to the question I recently received –
Thank you for your easy-to-follow explanations. I’ve just finished reading every entry and am hoping you can help me out. My mom passed away 6/2007 at age 67. She had two traditional IRA accounts, and my two brothers and I were named the beneficiaries. Unfortunately, my brother did not do anything with the account, and now that I am researching, I believe that we should have taken RMDs within the first year of her passing in order to have the stretch option. We have never taken any RMDs. Although Dec. 31, 2012 would have technically marked the 5 year point, I found one article that said that because 2009 was such a tough financial year for people, RMDs were not required for 2009. In turn, the year 2009 does not count toward the 5 year rule. Is this correct? Is our only option to take all the money out (about $220K) and suffer the tax consequences? Is there any recourse? I have heard there is a 5329 waiver form and that sometimes a letter to the IRS can help. I’m confused about what our options are at this point and would so appreciate any advice.
And my response –
I’m sorry for your loss. You are right about the choices. IRA rules are so complex, a sympathetic agent getting the 5329 waiver may accept the excuse, and let you take the 4 years of missed withdrawals. Indeed, the 2009 waiver extends the 5 years to 6, per http://www.irs.gov/pub/irs-drop/n-09-09.pdf and the sentence
- “If a beneficiary is receiving distributions over a 5-year period, he or she can now waive the distribution for 2009, effectively taking distributions over a 6-year rather than a 5-year period.”
So, it appears you can choose between a tax hit now or try to get forgiveness on the missed RMDs. If you don’t get the forgiveness, you can still choose between emptying the account and paying the tax or keeping them going, but pay the 50% penalty.
Before doing this, I’d do the math. If you were 40 when Mom passed, your first year RMD was 1/43.6 or 2.3% of the balance. When you add the 5 missed years, the total might add to just 15% or so. So a 50% penalty is half of the missed withdrawals or just a 7.5% total hit, less than the extra tax of each taking $110K all at once and getting thrown into a higher bracket. See publication 590, and form 5329, and let me know if you have a follow on question. Good luck to you!
That was my advice. Of course, I don’t know all the details I’d like. I don’t know the reader’s age, which is what the RMDs would be based on. Nor do I know her tax bracket. But I do know that $110K is a lot of money and can throw her from a marginal 15% to 28%. This is one of the reasons I love the stretch IRA. Most married couples should be able to take the RMD or a bit more, just enough to stay in the 15% bracket. Thank-you for reading, and keep those questions coming!