Beneficiary RMD

[Guest RPSS]

Under the IRS Final & Proposed Required Minimum Distribution Rules, April 2002, if an IRA participant died after his her required beginning date and the beneficiary is a non-spouse beneficiary, in order to set up single life expectancy non-recalculated payments, the non-spouse beneficiary must contact the financial institution by December 31 of the year following the death of the participant. If the non-spouse beneficiary does not contact the institution, what payment method is available for that non-spouse beneficiary? Can the beneficiary set up a SLE payment schedule and take catch-up payments subject to the 50% penalty (for the missed payments)?

[jevd]

It depends what the plan document says. The IRS default is payment over the life expectancy of the beneficiary. If the plan allows or is silent then the L.E. payment applies and it is my understanding that the penalty also applies for missed distributions.

Anyone out there with a different understanding.?

[Guest RPSS]

Thank you. The IRA plan document is the IRS model 5305-A. It states, in part, that "if the Depositor dies on or after the required beginning date and the designated beneficiary is not the Depositor's surviving spouse, the remaining interest will be distributed over the beneficiary's life expectancy as determined in the year following the death of the Depositor reduced by 1 for each subsequent year, or over the period in paragraph (a)(iii) below, if longer." Paragraph (a)(iii) refers to non-recalculated payments over the Depositor's life expectancy. Therefore, I hope everyone agrees that a life expectancy payment schedule is an option for the beneficiary, even if payments did not begin by 12/31 of the year following death. Of course, the beneficiary would be responsible for penalties on the excess accumulation. Does that sound right?

[jevd]

That sounds correct to me. The 5305 uses the IRS defaults unless the custodian modifies it.

The beneficiary should check with his/her accountant regarding reeporting the under distributions. Generally if they are corrected and there was a reasonable circumstance, the IRS may waive the penalty. See IRS form 5329 & instructions.

[Appleby]

The only option for a non-spouse beneficiary (not including non-persons) when the IRA owner dies after the required beginning date (RBD) is to take distributions over the beneficiary's non-recalculated life expectancy (as described above by RPSS)…that is unless the plan document requires the beneficiary to make an immediate and total distribution, which is not the case here, since the IRS model document is being used.

If the beneficiary feels that the missed RMD amounts were not distributed due to reasonable cause, he/she may write the IRS and appeal for a refund of the penalty.

Important... though not applicable to the question posted…If an IRA owner dies before the required beginning date, and the beneficiary is subjected to the five-year rule, any amount not distributed by the end of the 5th year, following the year the IRA owner dies, is subject to the 50 percent excess accumulation penalty.

It is important that the beneficiary “play catch-up”, by distributing the missed RMD amounts as soon as possible.

From Rev. Proc. 2008-50-APPENDIX A -OPERATIONAL FAILURES AND CORRECTION METHODS

.06 Failure to timely pay the minimum distribution required under § 401(a)(9). In a defined contribution plan, the permitted correction method is to distribute the required minimum distributions (with earnings from the date of the failure to the date of the distribution). The amount required to be distributed for each year in which the initial failure occurred should be determined by dividing the adjusted account balance on the applicable valuation date by the applicable distribution period. For this purpose, adjusted account balance means the actual account balance, determined in accordance with § 1.401(a)(9)-5 Q&A-3, reduced by the amount of the total missed minimum distributions for prior years. In a defined benefit plan, the permitted correction method is to distribute the required minimum distributions, plus an interest payment representing the loss of use of such amounts.

Edited to add correction method as described under Rev. Proc. 2008-50, in response to comments from Franky

[Guest franky]

Appleby, why do you say "he/she must play catch-up for the missed amounts (by distributing these amounts as soon as possible)?"

[Guest franky]

Appleby, I understand that the RMD should have been distributed by December 31 of the year following the year the IRA owner died. And, because it wasn't, I understand that the 50% penalty applies. However, where does it say that in addition to the 50% penalty, the missed RMD must be distributed as soon as possible ( i.e. he/she must play catch up)? My understanding was that if the taxpayer wants to apply for waiver of penalty that the individual must take steps to correct situation (i.e., RMD must be distributed as soon as possible). However, if individual is willing to pay penalty I didn't think that RMD had to be subsequently taken. Not taking missed RMD would result in future RMDs being larger because balance is larger; therefore, missed amount would eventually come out. Which leads to next question: What is your basis for saying "When an RMD amount is not distributed by December 31, the fair market value (FMV) for the following year must be adjusted (reduced) by the missed RMD amount." I know in the proposed regs. there was such an adjustment, but only in second distribution calendar year if first year's RMD was delayed until second year (no later than 4-1). But, final regs. eliminated this adjustment to the balance. But, I have never heard of the adjustment that you are describing. What is your basis for such an adjustment?