RMD for non spousal beneficiaries

[JKW]

I have a participant who was over 70.5 and still working in 2014 so did not plan on taking an RMD. He passed away in 2014 with children as the beneficiaries. The accounts will be split into inherited IRAs. The bene's did not complete the beneficiary paperwork until 12/31/14,not leaving enough time to make any transactions in 2014. My 1st question is - since an RMD was not taken in 2014, do they need to take one in 2015 for the 2014 amount before moving the account to an inherited IRA? Secondly will they need to take 2015 distributions of their own calculated in their individual accounts?

[GMK]

edit: I posted in error. see posts, below. Died before RBD, so no participant RMD for 2014. Beneficiary RMD's begin for 2015 or per the 5-year rule. sorry, GMK

[wrong->] Yup. And when the IRS asks why an RMD was not taken in 2014, write a letter explaining the timing, and they will likely waive the penalty ... or so I have read.

[or 5-year rule - >] and yup. If I read the chart correctly, for 2015, use the single life chart based on the beneficiary's age in 2015, and then for 2016 and after, reduce that life expectancy by 1 in each year. That is, you use the life expectancy table only once for a non-spouse beneficiary when the participant died on or after the RBD.

[ESOP Guy]

One minor point: If the person in question passed away in 2014 and was working in 2014 it would seem like the 2014 payment could be made as late as 4/1/2015 without fear of the excise tax penalty.

After all 2014 was the first year this person was both 70.5 and terminated.

On a more important point I think the plan has to make the 2015 RMDs before they send the money to the IRAs. This is like any other distribution coming from a plan. The first dollars from the plan have to the the RMD payment. The regulations are very clear on that point.

So net the plan has to make both the 2014 and 2015 RMD payments and then the balance can be sent to the IRAs.

[Lou S.]

If he passed away in 2014 and assuming he is not a 5% owner, isn't the the Required beginning date 4/1/15?

Therefore don't the distribution rules fall under the "death before required beginning date rule"?

see 1.401(a)(9)-5

http://www.law.cornell.edu/cfr/text/26/1.401%28a%29%289%29-5

and 1.401(a)(9)-3

http://www.law.cornell.edu/cfr/text/26/1.401%28a%29%289%29-3

I think beneficiaries need to satisfy either the "5 year rule" or "1 year rule" described in the regs.

[Lou S.]

Though I will say in the past we have always do it the way ESOP Guy describes above.

[ESOP Guy]

Part of the reason I think the 2015 RMDs have to be made before the payment is sent to the IRA is pure logic. (Although in this case I think the rules are clear also-- the RMD comes out as the first dollars)

The IRA would claim the it doesn't know what the RMD amount is or would say it is zero. After all to the IRA the 2015 RMD would be computed on the 12/31/2014 balance. What was the balance in the IRA on 12/31/2014? It was zero. The plan had the money on the day that is used to compute the RMD so simple logic says the IRS got that rule right.

I know logic and IRS rules don't have to match so maybe the IRS just go lucky this time.

Having said that whose life expectancy I would use is another question. I always go back and review those rules and talk inside the firm before I make the final decision as I can always relate to why people feel confused on this topic.

[JKW]

Esop guy- I completely agree that the 2015 rmd should be done before moving over. I just want to carify - he wasn't 70.5 in 2014, he was 73, it was just that he was active so didn't plan on taking the rmd for 2014. So is it still by 4/1/15?

So, the 2014 RMD would be done before 4/1/15, then the 2015 RMD, then rollover to inherited IRA.

[GMK]

As I was properly corrected above, if a participant dies before their Required Beginning Date (RBD), the participant does not have to take an RMD for the year in which the participant died, regardless of the age of the participant.

This person's RBD is 4/1/15, and he died before 4/1/15. No RMD for 2014.

RMD's to the beneficiaries begin in the year after the participant died (2015), generally based on life expectancy rule or the 5-year rule (check the terms of the plan). The beneficiary's RMD for 2015 is paid before the rollover to the inherited IRA.

[JKW]

Ok, so even if over 70.5, if someone works during the year and dies or retires in 2014, their RBD isn't until 4/1/15.

Thanks for the clarifications.