Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
RMD for inherited IRA in year of owner's death
Posted by: dac, December 5, 2008 05:48AM
My father died in March 2008. His three children are the named beneficiaries of his IRAs. Our understanding is that an RMD based on my father's life expectancy and the total balance in all his IRAs as of 12/31/07 must be taken by Dec. 31, 2008.

Each of us now has an inherited IRA account in our name containing 1/3 of the shares of the mutual funds in Dad's IRAs. The RMD for 2008 was not taken prior to establishing the inherited IRA accounts.

My question is, how will the IRS know that the distributions that the beneficiaries take together satisfy the RMD based Dad's life expectancy? And how will it be reported by us on our tax returns so that we are not subject to the 10% penalty?

I was interested to learn from another post that it is not necessary to sell shares and transfer cash to satisfy an RMD, one can merely transfer shares from the IRA to a taxable account.

Thanks for your help!

Re: RMD for inherited IRA in year of owner's death
Posted by: Alan S., December 6, 2008 05:43AM
Sorry to hear of your loss.

Your first paragraph is correct if your father passed after his required beginning date (4/1 of the year following the year he turns 70.5).

Your father's final tax return for 2008 should contain an explanatory statement that he did not take his RMD prior to death, and it should show the names and SSNs of the 3 beneficiaries. In addition, each of your beneficiary IRA accounts should be titled to show your SSN, but also your father's name as the original owner. You should each name your own successor beneficiary as well. On your own returns, just show your portion of the RMD on line 15 of Form 1040. Actually, you do not EACH have to take 1/3 of this RMD. As long as the correct total RMD is taken it does not matter how the 3 of you split it up. Of course, it is easier to just each agree to take your third. There is no potential 10% penalty, it's worse. THere is a 50% excess accumulation penalty if the RMD is not taken each year, although the IRS usually waives that if they accept the reason why the RMD was missed. Starting in 2009, you will each use your own single life expectancy for your RMD, since you created the separate accounts needed to qualify for that treatment.

Your final paragraph is also correct.

Re: RMD for inherited IRA in year of owner's death
Posted by: dac, December 6, 2008 06:18PM
Thank you, Alan. This is very useful information for us--particularly about how to handle the situation on my dad's final income tax return. We know about the 50% penalty on excess accumulations. A few years ago my dad remembered on December 31 that he hadn't arranged for his RMD, but his IRA was all in mutual funds and the stock market was closed because it was Saturday; hence, the distribution couldn't be made for a couple of days. His penalty amount for that lapse was refunded, but it took letter writing and followup. In addition his RMD for two years both had to be reported in the following year.
Am I right to assume that the 1099Rs reporting the distributions to the owners of inherited IRAs are coded to preclude the 10% early withdrawal penalty (two of us are younger than 59 1/2)?

Re: RMD for inherited IRA in year of owner's death
Posted by: Alan S., December 6, 2008 06:32PM
Yes, you are right. All 1099R forms for distributions from inherited IRAs are coded with a "4" in Box 7. This is the code that identifies a death distribution. They are all automatically exempt from early distribution penalties.

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