Catching up beneficiary IRA RMDs

Mar 19, 2023 Last reply: 3 years ago 3 Replies
D

Taxpayer has a beneficiary IRA inherited when father died in 2017. Never told his preparer about this until now and never took an RMD from it until now; probably assumed it wasn't necessary until he turned 72 last October but even then took RMD only from his own IRA and not the beneficiary one.



It would seem that this IRA is covered by the pre-SECURE "Stretch IRA" rules of computing RMDs on the beneficiary's life expectancy factors, although there's a question as to whether failure to take RMDs to date might somehow subject the IRA now to the SECURE 10-year clearout rule instead (though I'm not finding anything to support that idea).



Either way, best step now (for 2023)?



1) Take accumulated RMD this year to include prior missed 5 years based on Stretch?
2) Take initial RMD now based on Stretch as if first one, disregarding missed years?
3) Take 60% of IRA now, assuming it has to be cleared out by 2017 under SECURE?
4) Some other option?

Thanks for any insights.


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S

Well, first off, it's important to sort out the situation with the inherited IRA and the missed RMDs. Here are some steps you can consider:

  1. First, let's figure out the applicable rules for your inherited IRA. Since your father passed away in 2017, the pre-SECURE Act "Stretch IRA" rules should apply, which means that RMDs are calculated based on your life expectancy. The SECURE Act only applies to deaths after December 31, 2019, so it won't affect your inherited IRA. More details on the SECURE Act can be found here:
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  2. Now, let's tackle those missed RMDs. You should have started taking RMDs from the inherited IRA the year after your father passed away. The best approach is to take the missed RMDs as soon as possible and report the issue to the IRS. You'll want to file Form 5329 to report the missed RMDs and calculate the 50% excise tax on the missed amounts. However, the IRS may waive the penalty if you can show reasonable cause for the oversight. More information on Form 5329 can be found here:
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  3. Next, you'll want to start taking RMDs based on the Stretch IRA rules. Since you've already turned 72, you should take the 2023 RMD from the inherited IRA as soon as you can. Keep in mind that you'll need to continue taking RMDs from both your own IRA and the inherited IRA going forward.
  4. It's always a good idea to consult with a tax professional or financial advisor to help you navigate these complex issues. They can provide personalized guidance based on your specific situation.
  5. In summary, your best bet is to catch up on missed RMDs, report them to the IRS, and start taking RMDs based on the pre-SECURE Act Stretch IRA rules. Remember to consult with a professional to ensure you're making the right moves.
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S

I agree. But was it really the owner's ignorance alone? Was there some investment or tax professional who led him to believe that no RMD was necessary, even for five years? If so, and his belief in them was objectively reasonable, you'd have a good argument for waiving the penalties. I've seen the IRS waive quite large penalties in situations like that.

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