@fanfare wrote:
The answer to your question about your situation is on Page 9 left column,
in IRS Publication 590-B Distributions from (IRAs) for 2021
@poorchip
that's a pretty attenuated answer for a complicated question.
@poorchip
I am going to assume here that we can ignore the transfer of the IRA from the husband to the wife, since they occurred in the same year, and neither person took their RMD. If that is not a correct assumption, someone will have to correct me.
I'm also not clear on the effect of placing the IRA in the name of the estate instead of your wife as beneficiary. Possibly, the father-in-law designated his wife as beneficiary but she never designated a new beneficiary so the IRA went to the estate. That may have significant legal complications. It probably means that the estate must be probated before your wife can access the funds. It also means the IRA must be shared with any other heirs according to the terms of her mother's will, or the state's intestacy laws if there is no will. Also, if the beneficiary of the IRA is an estate, rather than a person, the IRA must be cashed out within 5 years, not 10 years. Nor can your wife roll over the money into her own IRA. It must be spent, cashed out, and the taxes paid—although she can choose to do it all at once or spread out over 5 years.
First, of course, is the issue of the mother's RMD. Since the beneficiary of the IRA is the estate, then I believe (but I am not certain) that the estate must take the RMD and pay the income tax, if any. The estate may then forward the proceeds to the heirs under the terms of the will. The estate is also subject to the penalty for not taking the RMD, which is 50% of the amount of the missed withdrawal.
I really want to send you to a professional. There are people here with better advice than me, but a professional in your area would be even better. What I think needs to happen is for the estate to take a withdrawal ASAP, then file an estate tax return reporting the withdrawal as income, also reporting the missed RMD (which was due December 31) and ask for a waiver of the missed RMD penalty on form 5329 for cause (confusion, bereavement, etc.). (When asking for the waiver, be sure to mention the withdrawal was taken as soon as you discovered the mistake.) Then the estate must take further withdrawals over the next 5 years to cash out the account and pay any income tax owed on the money on further estate tax returns. The estate could cash out all at once, or spread it out, depending on her financial and tax situation.
I believe it is also possible for the IRA (which is currently an inherited IRA in the name of the estate) to be directly transferred to an inherited IRA in the name of the daughter. It will still be considered an inherited IRA and still must be cashed out within 5 years, and can't be mingled with your wife's other retirement accounts. Immediately after the transfer, the daughter would take the missed RMD. The daughter files an amended 2021 tax return reporting the missed RMD on form 5329, and asks for a waiver of the penalty for cause. (In fact, since this change—reporting the penalty while asking for a waiver—results in no tax owed, and because form 5329 has its own signature line, form 5329 for 2021 can be filed on paper without actually filing an entire amended return.). Your wife will get a 1099-R for the withdrawal that will be reported as taxable income on her 2022 tax return. Then, she has about 4 more years to close out the account.
But I hope one of my colleagues comes along to review my answer
@dmertz
@macuser_22
