Tag Archive for RMD
Taxpayers who inherit IRAs also inherit the decedent’s basis or amount invested in those IRAs, regardless of the relationship between the beneficiary and the decedent. Ideally, the decedent will have filed IRS Form 8606 (Nondeductible IRAs), showing the amount of basis in the IRA. Any remaining basis in the IRA shown on Form 8606 then becomes the beneficiary’s basis. However, if the decedent did not file Form 8606, the taxpayer has the same challenges as any IRA owner in demonstrating that he or she has basis in the IRA.
If the decedent had no basis in the IRA at the date of death, the beneficiary is taxed fully on distributions from the inherited IRA which must equal or exceed the Required Minimum Distribution (RMD). If the decedent did have basis in the IRA, the beneficiary must file Form 8606. The 1099-R issued by the payer should identify whether there is basis in the IRA.
Generally, there are several options for how to handle the inherited IRA, and the RMD rules differ for each option. Check out these three:
1. Treat the account as her own IRA by designating yourself as the account owner. If you treat the IRA as your own, you will have to take RMDs if over 70 1/2. However, you may use your own life expectancy for the RMD calculation, so theoretically less will be withdrawn from the account with each distribution.
2. Roll the IRA into your own existing IRA or qualified plan subjecting yourself again to the RMD
3. Treat yourself as the beneficiary of the IRA instead of the owner and begin taking distributions over her life expectancy.
The basis and Fair Market Value (FMV) of an inherited IRA are kept separate from your basis and FMV in your own IRA. If you elect to treat the inherited IRA as your own, the inherited IRA could be aggregated with his other IRAs on Form 8606.
Beneficiaries must begin to take required distributions from the account by December 31 following the year of death. If the beneficiaries are nonresident aliens for U.S. tax purposes, the IRA trustee may need to withhold U.S. tax on the distributions.
If the owner of an IRA dies before reaching the required beginning date for RMDs, each beneficiary can take required minimum distributions based on her own life expectancy, or take a distribution of the entire account balance by December 31 of the calendar year that includes the fifth anniversary of the decedent’s death.
Unfortunately, according to IRC 4974 if an RMD is not taken, a hefty fifty-percent excise tax may be assessed. Penalties are reported on IRS Form 5329. The IRS however may waive the fifty-percent penalty if there was a reasonable cause for failing to take the distribution such as erroneous advice given, and steps to correct the error have been taken.
If there was a reasonable cause for failure to take the RMD, the taxpayers need not pay the fifty-percent excise tax when they file their tax returns. Form 5329 instructions direct the taxpayer to complete lines 50 and 51 and enter “RC” and the amount of waiver requested on the dotted line next to line 52. This amount should be subtracted from the total, with the tax paid on the remaining amount (line 53).
Many people turning 70 see themselves in the prime of their life. A pervasive problem among this group is this idea of a Required Minimum Distribution (RMD) from their retirement savings accounts. Many people do not like to withdraw money from their retirement accounts particularly with investments still negligibly recovering from the crash of 2008. I have noticed that there is a good deal of confusion over RMD’s and many investment professionals seem to be having a problem expressing how they actually work. In fact I had an experience with one today that prompted me to research and recite the tax code to win an argument and as such I blog about it.
According to Reg. §1.401(a)(9)-8, you must have a separate determination of your Required Minimum Distribution (RMD) from each of your employer sponsored retirement plans including 401(k), profit sharing, defined benefit, etc. Each of these RMDs must be withdrawn from their respective accounts annually after you reach the age of 70 1/2.
HOWEVER with Individual Retirement Accounts (IRA’s) including SEP’s and SIMPLE’s even though you must have each separate RMD calculated by account, Reg. §1.408-8 allows you to aggregate the IRA RMDs and draw the funds out of a single IRA or combination of IRA accounts. In other words you do not have to take RMD’s from each and every IRA you own as long as you withdraw in total from any particular IRA account or combination of accounts an amount equal to the calculated RMD for the combined total of all the IRA’s.
The lesson learned here is that if you have multiple types of retirement savings investment accounts you can expect multiple RMD’s. If you have multiple IRA’s you can aggregate the RMD’s and take the withdrawal from any account or combination of IRA accounts you choose as long as the RMD threshold is met.