This week, Ed examines a difficult IRA and also looks at how to handle primary beneficiaries.

Disecting a Complicated IRA

An 85 year old woman we'll call Agnes died in 2007 and left her IRA to her sister, Ruth. Agnes had already taken her 2007 RMD. 

Ruth began taking monthly withdrawals in January 2008 and then she died in July. She turned 83 in 2008. Ruth had named her nephew Pete as her successor beneficiary, and I don't think she took all of her 2008 RMD before she died.

Pete successfully retitled the IRA with himself now listed as beneficiary of Agnes' remaining balance, and in 2009 his RMD was obviously waived. It's his 2010 RMD where I believe there's a problem. I say it's calculated by dividing the Dec. 31, 2009 IRA value by 6.6 (Ruth's Table 1 life expectancy was 8.6 in 2008 ... no RMD in 2009, though the factor would have been 7.6...and then in 2010, Pete would use 6.6). The RMD would have been around $7,000. Pete's CPA told him that he can use his own life expectancy of 24.4 (he turned 61 in 2010), so Pete took out less than $2,000. I say Pete has an under-distribution of about $5,000. Secondarily, I also say Ruth's remaining 2008 RMD should have been withdrawn in 2008.

Am I right? What do you suggest if I am?


Paul Rodgers

You’re definitely right – on everything. A beneficiary always uses the Single Life Table (what you referred to as Table 1) in order to calculate their RMD. Successor beneficiaries, like Pete, must generally continue minimum distributions using the original beneficiaries remaining life expectancy.

Based on the information provided, you’ve correctly calculated the factor at 6.6 for Pete’s 2010 distribution, so it sounds as if there was, indeed, a shortfall with respect to the RMD. Pete, as the account’s new owner would also be responsible for taking any missed RMDs from the previous two owners.

So here’s what I would recommend going forward… Immediately take a distribution for the total shortfall in all previous RMDS. File Form 5329 and request a waiver of the penalty – IRS Form 5329 must be filed for each year there was a missed distribution (use the version of the form for the year that was missed). IRS can even waive the penalty for good cause and believe it or not, they are actually pretty forgiving in this area. To get the penalty waived, file the forms along with a letter of explanation (payment of the penalty is not required with the form). The letter should include why the distributions were missed, the fact that they have now been taken, and that steps have been taken to assure that future distributions will be as required. You probably won’t hear back from IRS. After three years have gone by, you are home free. If the Form 5329 is filed without payment of the 50% penalty and IRS determines that the penalty is owed, the client could owe interest on the penalty payment.
Primary Beneficiary Woes

Have an existing client with IRA at Fidelity. 80 years old, three children as named primary beneficiaries. Taking RMDs.

At his death, beneficiaries want to stretch.

Can they stay at Fidelity? (They may not want to.)

Can they go to another vendor? (They may want to.)

Do they have to split account today? (Not IRA holder's wishes)

Thanks for your help.

Generally speaking, if a person (or persons) has been named directly on the beneficiary form (and there are no non-designated beneficiaries, such as a charity also listed) the beneficiary will be able to use the stretch. Some IRA custodians, however, do not allow beneficiaries to stretch distributions per their custodial agreement.

This is very rare to find anymore, but it’s always best to check to make sure. So as long as you've got a living, breathing beneficiary named on the beneficiary form and a custodian that allows the stretch, you're good to go.

Non-spouse beneficiaries cannot make 60-day rollovers… ever! This is mistake that many beneficiaries and advisors make, and unfortunately it’s irreparable. That doesn't mean that beneficiaries have to be stuck with the same investment or custodian forever though. Under the Tax Code, non-spouse beneficiaries (like children) can move inherited IRAs by means of trustee-trustee transfers. These are the tax rules though, and like the stretch IRA, a custodian can be more restrictive if it likes and doesn't have to allow trustee-to-trustee transfers after death. Just another reason to check the custodial document now, while original IRA owner is alive (and could move the funds if need be).

No. They don’t have to split the account today. In fact, the account can be split anytime before or after the IRA owner’s death. If each child wants to use their own life expectancy to calculate RMDs, the account must be split by Dec. 31 of the year following the year of death. It can always be split later, but all beneficiaries would be stuck using the oldest child’s life expectancy to calculate RMDs.

The split, if done after death by the beneficiaries, must be done as a direct transfer (a trustee-to-trustee transfer) where the funds are transferred directly to properly titled inherited IRAs (keeping the name of the deceased IRA owner in the account titles) without any funds being withdrawn.