I inherited an IRA from a parent that pasted. How do I go about using the 5329 form in regards to withdrawing the funds with no penalty? Reason #4??

[Nikolette-]

Can I just go and withdrawal all of the funds today and prepare the form next year with my taxes or do I complete the form first in order to see if I will be billed a penalty?

[Hal_Al]

Yes, you can just go and withdrawal all of the funds today and prepare the form next year with your taxes.

Yes, you will use code 04, of form 5329, for the penalty exception.

In TurboTax (TT), you will enter the 1099-R your receive, in January 2018. The TT interview will identify the inherited IRA and generate the form 5329, if needed.

You will not pay a 10% early withdrawal penalty. The distribution will be taxable. There is no exception to the tax.

[Nikolette-]

How much will I be taxed?

[Nikolette-]

Also, how to I avoid the penalty that I am going to be billed for now taking any funds out last year?

[dmertz]

Since the Form 1099-R will have code 4 in box 7, no Form 5329 Part I is needed to report the distribution and TurboTax will not generate one for this.

If your parent died in 2016 and had not completed their 2016 RMD, if any, or if your parent died before 2016 and you were required to take a distribution in 2016 as beneficiary, you must complete Form 5329 Part IX to report the missed RMD.  We can elaborate on the requirements for making the late RMD distribution and requesting a waiver of the  50% excess accumulation penalty on Form 5329 Part IX if you let us know:

1. the year in which your parent died,
2. whether or not your parent died before April 1 of the year following the year in which your parent reached, or would have reached, age 70½, and
3. whether or not you received any distributions from this account in 2016.
   

[Nikolette-]

Do I call you all? How do I provide you all with the information requested? Thank you for your help!!

[Nikolette-]

2015, no she died in May, no I did not receive a distribution in 2016

whether or not your parent died before April 1 of the year following the year in which your parent reached, or would have reached, age 70½, and
whether or not you received any distributions from this account in 2016.

[dmertz]

By "we" I mean the users of this forum.  This is a public user-to-user forum and questions are answered by many TurboTax users as well as TurboTax employees.  I specialize in answering IRA-related questions.

If she died in 2015 before reaching the date she was required to begin receiving distributions, April 1 of the year following the year in which she would have reached age 70½, you have the option to use the 5-year rule for distributing instead of spreading distributions out over you life expectancy.  Using the 5-year rule would mean that no RMD would have been required by her or by you to this point, but the entire IRA must be distributed by the end of the 5th year following the year of her death.

If she died in 2015 after the date she was required to begin receiving distributions, it was your responsibility to complete her 2015 RMD if she had not done so.  You were also required to receive a 2016 RMD from this account as beneficiary.  If did not receive these, you must take them now (taking a distribution of the entire account will accomplish this) and file 2015 and 2016 Forms 5329 to request a waiver of the 50% excess accumulation penalties for 2015 and 2016.

[Nikolette-]

The bank told me that the first year I didn't need to worry about taking a 2015 RMD. He also was not near 70 when he died. This sounds complicated. I might not need to do my own taxes for the next two years until this is cleared up. :( I may have to call in for help when I complete my taxes.

[fanfare]

You don't have to worry about a 2015 RMD, but you do have to consider your options for 2016 and beyond. You had the option to take an RMD in 2016 to spread the IRA distributions over your lifetime.
Since 2016 is over, you may not have that option any longer. (dmertz is the expert).
See IRS PUB 590-B available at <a rel="nofollow" target="_blank" href="http://www.irs.gov">www.irs.gov</a> for your options.

[dmertz]

Taking distributions based on your life expectancy is the default unless the IRA custodial agreement says otherwise.  As long as the IRA custodial agreement does not dictate that the 5-year rule applies under the circumstances, by making up the late 2016 life-expectancy based RMD, you can "restore the stretch."  If you do this, you'll also need to request a waiver of the excess accumulation penalty on this late distribution on 2016 Form 5329.  (Unless you have another reason that 2016 TurboTax would ask about RMDs, TurboTax does not provide the ability to prepare this Form 5329 for inclusion with your e-filed tax return; you'll need to prepare this Form 5329 manually and mail it with your tax return.)  If you choose to stick with distributing the entire IRA before the end of 2020 under the 5-year rule, no Form 5329 is required.

[fanfare]

Interesting. From what I've read, you lose the option if you don't initiate the RMDs in the first year. Maybe I was overly cautious and misinterpreting.
Most people (all?) never read their custodial agreement. I suppose then you need to contact the custodian to see what rules will apply?

[dmertz]

See PLR 200811028:  <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-wd/0811028.pdf">https://www.irs.gov/pub/irs-wd/0811028.pdf</a>
(In the case of this PLR, the taxpayer did not choose to request a waiver of the excess accumulation penalty, but I see no reason not to.)