RMD after RBD and after death

[Guest Jeanne]

Hello, I need help with an RMD. I work for a transfer agent/IRA custodian and we can't agree on the best way to approach this situation. I have researched Pub 590 and found no definitive answers there and I have also reviewed Regulation 1.401(a)(9)-1, A-2©(1).

The Scenario:

Joe, an IRA holder is 81. Joe has been taking his RMD faithfully every year in September. His wife, Molly, is his sole beneificary.

Joe died two weeks ago before his 2003 RMD was taken out of his IRA account.

The Question:

Can we (as custodian for Joe's IRA) take his RMD directly out his account then transfer the balance of the account to Molly?

Our outside retirement services consulting firm has advised that we:

- move Joe's assets to a decedent IRA registration that includes his name and Molly's and is referenced under her tax ID

- remove the RMD from this new account

- and then move the balance to Molly's IRA (she is assuming Joe's IRA as her own)

This seems cumbersome to us.

I would like to know if we can simply take Joe's RMD directly from his existing IRA and then transfer the balance to Molly.

Since Joe was alive in 2003 he, or rather his executor, is going to have to pay taxes for him this year anyway.

Aren't IRA holders required to take the RMD beginning on January 1 and they are given until 12/31?

What if we didn't know that Joe had died and had sent his RMD check anyway?

Thanks for your help!

-- J

[Guest Derelict]

The consulting firm is correct.

The wife cannot assume the RMD for 2003, this was patched in the recent final regs. This amt is taxable to the wife.

As for the dead guy getting a check, that should be returned... although I rarely see this happen.

I'll post back if i can dig up the reg cite.

[edit]

1.408-8 QA-5

[/edit]

[mbozek]

Most IRA custodial accounts provide that the beneficiary becomes the owner of the IRA for all purposes after the death of the owner. I thought the IRS regs require if the owner dies before the MRD for a year is paid, the MRD due the decedent must be paid out to either the estate or the beneficiary by 12/31. I dont see why the spouse, as IRA owner, could not request the MRD be paid to her from the decedent's IRA to satisfy the MRD requirement and then request that the balance in the IRA be rolled over to her IRA.

I would ask the consulting firm for the authority for their position.

If the check was not cashed by the owner before he died it would be considered an asset of his estate and would be deposited to the estate's account by the executor - the same as a stock dividend. It would meet the mrd requirements.

Derelict: I dont understand the reference to the reg you cite.

[Guest Derelict]

1.408-8

Q–5. May an individual’s surviving spouse elect to treat such spouse’s entire interest as a beneficiary in an individual’s IRA upon the death of the individual (or the remaining part of such interest if distribution to the spouse has commenced) as the spouse’s own account?

A–5. (a) The surviving spouse of an individual may elect, in the manner described in paragraph (b) of this A–5, to treat the spouse’s entire interest as a beneficiary in an individual’s IRA (or the remaining part of such interest if distribution thereof has commenced to the spouse) as the spouse’s own IRA. This election is permitted to be made at any time after the individual’s date of death. In order to make this election, the spouse must be the sole beneficiary of the IRA and have an unlimited right to withdraw amounts from the IRA. If a trust is named as beneficiary of the IRA, this requirement is not satisfied even if the spouse is the sole beneficiary of the trust. If the surviving spouse makes the election, the required minimum distribution for the calendar year of the election and each subsequent calendar year is determined under section 401(a)(9)(A) with the spouse as IRA owner and not section 401(a)(9)(B) with the surviving spouse as the deceased IRA owner’s beneficiary. However, if the election is made in the calendar year containing the IRA owner’s death, the spouse is not required to take a required minimum distribution as the IRA owner for that calendar year. Instead, the spouse is required to take a required minimum distribution for that year, determined with respect to the deceased IRA owner under the rules of A–4(a) § 1.401(a)(9)–5, to the extent such a distribution was not made to the IRA owner before death.

(b) The election described in paragraph (a) of this A–5 is made by surviving spouse redesignating the account as an account in the name of the surviving spouse as IRA owner rather than as beneficiary. Alternatively, a surviving spouse eligible to make election is deemed to have made the election if, at any time, either of the following occurs —

(1) Any amount in the IRA that would be required to be distributed to the surviving spouse as beneficiary under section 401(a)(9)(B) is not distributed within the time period required under section 401(a)(9)(B); or (2) Any additional amount is contributed to the IRA which is subject, or deemed to be subject, to the lifetime distribution requirements of section 401(a)(9)(A).

© The result of an election described in paragraph (b) of this A–5 is that the surviving spouse shall then be considered the IRA owner for whose benefit the trust is maintained for all purposes under the Internal Revenue Code (e.g., section 72(t)).

[Guest Derelict]

I do not have backing for the check argument but I do not see a analogy with the non-elective stock div vs an elective IRA withdrawl (Standing instructions). Those instructions would cease once the custodian was informed that the participant had passed... stock div's would not. You also mention the check not being cashed. I would agree that as long as the Participant was alive on the withdrawl date, yes that $$ should not be returned.

ex. Jon, ira participant, takes 100k each July 30, dies on June 30th but the check goes out anyway and his sister is the sole bene of that IRA. Who's 100k is that? had the custodian been notified on july 1 that $$ would not have gone out...

[mbozek]

D: The reg you cite confirms that the spouse must recieve the MRD that was due the owner.

[Appleby]

On the issue of handling the RMD for the year of death, the consulting firm is correct…Derelict and mbozek are also correct... While on the surface it appears that there is disagreement here, I think there is actually no disagreement. You see… the matter is one of operations, i.e. how the transaction is handled.

From the comments made, it appears we all agree that the end result should be the same…i.e. the RMD for the year of death (assuming the IRA owner did not fulfill this RMD amount before death) cannot be distributed to and reported under the tax ID number of the deceased. Instead, such amount should be reported under the tax ID number of the beneficiary and is taxable to the beneficiary.

How this is handled operationally is usually determined by the capabilities of the systems used by the financial institution to process such transactions.

Some financial institutions are able to flag the original account as the owner being deceased, add the name of the beneficiary to the title, process the distribution from the same (original ) account and have it reported under the tax ID number of the beneficiary and the names of the beneficiary and the deceased. Other financial institutions, because of system limitations, must move the assets to a separate account to accommodate the required tax reporting. For both methods, the end result will be the same.

[mbozek]

I agree with appleby. The IRS only requires that the mrd for the year be distributed. It does not care who receives the MRD.

[mbozek]

Derelict: I am not really sure what your saying about the uncashed IRA check. The unchased check payable to the decedent is asset of the decedent's estate. ( I dont see the relevance of standing instructions). Under most state laws the executor of the estate has the duty to marshal and collect all assets of the decedent including uncashed checks. Hence my reference to uncashed dividend checks. The assets of the estate (including the MRD) will then be distributed according to the decedents will (or if there is no will under the laws of intestacy).

Also while I concur with appleby's asessment of how the IRA accounts are handled after the death of the owner it is necessary to make sure that the IRA account retains the proper character in the hands of the beneficiary. For exemple if the surviving spouse is under 59 1/2, the new account must remain in the name of the decedent with the spouse as owner/beneficiary in order for the spouse to withdraw the funds without being subject to the 10% penalty tax. Some custodians insist on creating a new account in the spouse's name/ssn which triggers the 10% penalty tax if withdrawals are made.

[Appleby]

mbozek...Good point (and good financial planning strategy) about the spouse who is under age 59 ½, keeping the assets in an inherited/beneficiary IRA to avoid the 10 percent early distribution penalty on amounts distributed while he/she is under age 59 ½.

QUOTE (mbozek @ Aug 15 2003, 01:42 PM)

Some custodians insist on creating a new account in the spouse's name/ssn which triggers the 10% penalty tax if withdrawals are made.

If I was in such a position and my IRA Custodian insisted that I transfer the assets to my own IRA, I would reevaluate my relationship with that custodian. … who wants to pay 10 % as penalty on distributions when you could avoid doing so. The Custodian should give the spouse the option to choose (between having the inherited assets transferred to an inherited/beneficiary IRA-“ in the name of the decedent with the spouse as owner/beneficiary” and having the assets transferred/rolled to the spouses own IRA).

Addendum… a beneficiary who chose to have the assets transferred to an inherited/beneficiary IRA may later transfer the balance to his/her own IRA. This could be beneficial for an individual who wants to take lower RMD amounts, by using the uniform table as opposed to the single life table (which would be required for the inherited/beneficiary IRA.

[Guest Derelict]

I come from a land where each account can only report on one TaxID/SSN so I did state to whom the RMD was taxable to, not which account.

As for the check, like I said before I don't have much backing for it other than my example:

Participant A has standing instructions to distribute $10k from IRA X with Co. Y each month on the 15th. A dies on June 16th. A had at the time of death listed sister B as beneficiary of IRA X. Co. Y is not informed of the participants passing until July 30th.

June & July checks remain uncashed at this point. What money goes where?

I argue that the July $10K is rightfully the sister B's beneficial IRA money, and should be returned and the June's payment is the estate's $.

Had the Custodian been informed that the participant prior to that check being cut in July, the money would have been inherited by B as bene of X's IRA.

I confuse myself sometimes...

[Guest Jeanne]

Thanks to all who had input on my question/topic. All of your information, ideas and opinions were very helpful!

Best regards to all,

Jeanne

[Guest ArrowMatt]

I have a similar situation but what if the person that died was over 70 1/2 and the sole beneficiary, his wife, was also over 70 1/2? Does this create a new problem? Do 2 RMD have to be processed for the same year?

[Mary Kay Foss]

You do not need to process two distributions. The spouse will get the decedent's RMD for the year of death if he/she had not previously taken it. The spouse's first distribution as a beneficiary based on his/her single life expectancy occurs in the year after the death.

The spouse can do a rollover also and switch to the uniform table for distributions. If the rollover is accomplished during the year of death, the spouse's first distribution from the rollover account will occur in the year after death. The rollover can be done at any time; the spouse will sometimes receive one or two distributions as a beneficiary before the rollover. Distributions are much smaller under the uniform table so many spouses roll over as soon as possible to get the maximum tax deferral from the IRA assets.