Inherited IRA - RMD and 10yr Rule

[tuneman01]

My wife inherited Traditional IRA when her mother (dob 03/1933) passed away on 08/2014 (81 yrs at the time).  My wife was 51 yrs at the time on 08/2014 and had been receiving RMDs since then.  For some reason, the bank did not send an RMD during 2023.  We are trying to find out why.  Is there a penalty and who is responsible for the penalty?  Does this IRA fall under the 10 yr. rule since it looks like it would be this year 2024?  Can it be rolled over or have to withdraw it?  Would the withdrawal be taxed at our current tax rate?  Thank you

[dmertz · Accepted solution]

The 10-year rule does not apply since your wife's mother died before 2020.

The late 2023 RMD must be completed now and will be 2024 income along with the 2024 RMD to be competed by the end of 2024.  With the 2023 RMD completed, albeit late, a waiver of the excess accumulation penalty can be requested on 2023 Form 5329 as indicated in the instructions for Part IX of Form 5329.

While 2023 TurboTax can prepare the Form 5329 for inclusion in an e-filing of your tax return, TurboTax makes it almost impossible to do so when the individual requesting the waiver is under RMD age as in this case.  It might be simplest to prepare the 2023 Form 5329 outside of TurboTax and include it with a paper-filed tax return.  The 2023 Form 5329 requesting the waiver can also be prepared in forms mode of the CD/download version of TurboTax, but it could get deleted if one revisits the 1099-R section of TurboTax after doing so, so one has to be very careful when doing this.

[tuneman01]

So in my 2023 Turbo Tax return do I completely remove the IRA/RMD entry that I normally have or do I leave it in there and report zero dollars received?  Thank you

[dmertz]

Good question!  I hadn't thought about it before, but having the Form 1099-R present will cause TurboTax to ask if the RMD was completed, allowing the Form 5329 requesting waiver of the excess accumulation penalty to be completed within TurboTax.  However, a Form 1099-R being present that reports a distribution of less than $0.50 (which rounds to zero) disallows e-filing.  You might consider entering $1 in boxes 1 and 2a instead of $0.  Just make sure that there is no tax withholding shown.  The IRS isn't going to complain about your tax return showing an extra $1 on line 4b of Form 1099-R.  Sounds like a good workaround to me.

[tuneman01]

Hmm, well we just received a "corrected" 1099-R for the IRA-RMD showing $0 for boxes 1, 2a, and 4 (withholding).  I entered that, reviewed the return, shows no errors and it says its ready for e-filing.  Unless it will fail when I actually do it.  Also, it looks like it's not asking me to fill out form 5329.

[dmertz]

If that's the online version of TurboTax, perhaps it behaves differently than the CD/download version that I used for testing.  Generally, when there is a corrected Form 1099-R showing that no distribution actually occurred, neither the corrected form nor the original form being corrected should be entered.  It's not until I click Continue on the page that the CD/download version where I select the federal and state tax returns to be e-filed does TurboTax present the message that the tax return contains forms that cannot be e-filed.  (It's odd that TurboTax even does that because Forms 1099-R with no tax withholding shown don't get included in the e-filing anyway.)

[tuneman01]

It's the downloaded version on my desktop.

[tuneman01]

I guess create the 2023 form 5329 in forms mode and enter 0 with explanation to request the waiver and see if it submits electronically?

[dmertz]

It would be better to prepare the request for waiver in step-by-step mode since it's not quite obvious how to do it in forms mode.  You can actually enter the $0 Form 1099-R, create the request for waiver in step-by-step mode, then delete the Form 1099-R in forms mode.  As long as you never again click the Continue button on the page that lists the Forms 1099-R that you have entered, TurboTax will not delete the request for waiver.  If you do click the Continue button on that page, TurboTax will make the request for waiver vanish and you'll have to do it again.

[tuneman01]

How do I create the request for waiver in step-by-step mode?  I go to form and open form, click on step-by-step mode and it goes back to the overall return and closes the 5329 form.  Thanks

[dmertz]

After entering the $0 Form 1099-R with code 4 in box 7 and indicate that the distribution is all RMD, click the Continue button on the page that lists the Forms 1099-R that you have entered, indicate, when asked, that you did not complete all of your RMD and enter the explanation statement, then delete the $0 Form 1099-R.

[tuneman01]

Just an update - I submitted the RMD waiver form along with the $0 1099-R form and it was accepted by IRS.  I'm using the desktop version of the software.  We also requested a distribution for the missed 2023 RMD and now the bank has sent a corrected 2023 1099-R with the distributed amount and tax withheld.  Shouldn't this be on a 2024 1099-R since it wasn't paid out until this year (2024)?  Thanks

[dmertz]

"now the bank has sent a corrected 2023 1099-R with the distributed amount and tax withheld. "

You are correct, it's improper for the bank to have done this, but it's not the first time I have heard of that being done.  Now you'll have to amend your 2023 tax return.  Particularly since taxes were withheld, it would be impractical to convince them to correct this 2023 Form 1099-R to show that no distribution and no tax withholding occurred in 2023.