Here is what financial advisers need should know to help their clients navigate this complex set of IRA rules.
By Sarah Brenner
Questions consistently arise about the correct way to handle the required minimum distribution (RMD) in the year of death of an IRA owner. Here is what advisers need to know to help their clients navigate this complex set of rules.
Death After the Required Beginning Date
The RMD for the year of death will only need to be taken if the IRA owner died on or after the required beginning date (RBD). The RBD is April 1 of the year following the year the IRA owner reaches age 72. If an IRA owner dies before that date, there is no RMD required for the year of death. This is still true even if the IRA owner is already 72 and even if a portion of the anticipated RMD has already been taken.
A year-of-death RMD is never required from a Roth IRA. This is because all Roth IRA owners are considered to have died before their RBD. Nothing needs to come out in the year of death.
The Beneficiary Must Take the RMD
The IRA beneficiary must take the year-of-death RMD. This is an area of great confusion. If the year-of-death RMD was not already taken by the IRA owner, it must be taken by the beneficiary. It is not paid to the IRA owner’s estate unless the estate is named as the beneficiary.
Due to the confusion, the IRS confirmed this rule in regulations and in Revenue Ruling 2005-36. In public conferences, IRS rule writers have also stated this position, even though the question of WHO takes the required distribution is technically beyond the scope of the IRS withdrawal rules. This is because under state law, the minute the IRA owner dies, the balance in the IRA belongs to the beneficiary, NOT to the estate. The estate could have different beneficiaries than those listed on the IRA beneficiary designation form. The fact that the beneficiary does not have to withdraw the entire account the minute after the IRA owner dies does not make the account any less his. The beneficiary will also pay the tax on the distribution. It will be reported on the beneficiary’s personal tax return (Form 1040), not on Form 1041 (the estate’s income tax return).
Calculating the Year of Death RMD
The RMD for the year of death is calculated as if the IRA owner had lived. In most cases, this means using the Uniform Lifetime Table. The year-of-death RMD can be aggregated with other inherited IRAs, but there are limits. These limits are the same that apply to any aggregation of RMDs by beneficiaries. The inherited IRAs must be the same type and inherited by the same beneficiary from the same IRA owner.
Any changes put in place by the SECURE Act to the rules for inherited IRAs do not change the requirement that the year-of-death RMD must still be taken by the beneficiary. In the years that follow the year of death, the beneficiary will switch to the Single Life Expectancy Table if annual RMDs are required.
Surviving Spouses
The regulations are clear that even a spouse beneficiary does not get a pass when it comes to the year-of-death RMD. It must be paid out or there will be a penalty. However, a spouse who is doing a spousal rollover by transfer or by treating the account as her own does have some flexibility. The IRS only cares that the year-of-death RMD is taken. It does not care from whose account the RMD is distributed.
A spouse beneficiary can transfer the entire account to an IRA in her own name or treat the account as her own and then take the RMD from that account. The RMD is calculated the same way a year-of-death RMD is always calculated–as if the IRA owner had lived.
However, if the spousal rollover is done by a 60-day rollover (which is unusual but does happen from time to time), there is no flexibility–the RMD must be paid from the deceased spouse’s IRA as a death distribution. Because it is an RMD, it is not eligible for rollover. This is one more reason to avoid 60-day rollovers.
New SECURE Act Relief
If the year-of-death RMD is not taken, there is a 50% penalty. This has always seemed unfair, because depending on exactly when an IRA owner died, there may not be much time for the beneficiary to take the RMD before the Dec. 31 deadline.
The proposed IRS SECURE Act regulations provide some relief. The proposed regulations allow for an automatic waiver of the 50% penalty as long as the year-of-death RMD is taken by the beneficiary’s tax filing deadline, including extensions. This waiver will be very helpful for beneficiaries who find themselves in tight situation with time when an IRA owner dies near the end of the year without taking the RMD for that year. As long as they remove the year-of-death RMD by their tax-filing deadline, including extensions, the penalty will be waived automatically.
A beneficiary who fails to take a year-of-death RMD, even by that extended deadline, still has a potential remedy. He can take the missed RMD and file Form 5329 and ask for a waiver of the penalty. The IRS has generally been willing to grant these requests.
About the author: Sarah A. Brenner, JD, is director of retirement education at Ed Slott and Company. Learn more at www.irahelp.com.
