Inherited IRA Beneficiary - No RMDs taken

[Tami71]

Hello Tax Experts!

My dad passed in 2012 (age 84), but I didn't receive his inherited IRA (traditional) until July 2015. I thought RMDs were all based on the living person's age (I'm not 65 or 70 yet!), so I just let the account sit as is.

My mutual fund company alerted my that RMDs need not be taken for 2019 (CARES Act), which prompted me to ask why I was alerted of this (thinking I hadn't hit the milestone years). 

Given my situation, what is the best method for fixing my errors, and if I need to withdraw, how do I know how much?

Thank you in advance!

[macuser_22]

The RMD requirement is based on the age the deceased would be if still alive.  The financial institution holding the IRA had a duty to inform you of the RMD amount each year.  Also when you entered the 1099-R with a code 4 and the IRA box checked, the interview would prompt you for the year the decedent was born and then ask about if the RMD was taken.

You have a problem now because there is a huge 50% penalty for each missed RMD which the IRS can waive if you request a wavier and provide an reasonable explanation as to why it was missed.

First you need to have the IRA custodian calculate the RMD amount for each missed year and then take a distribution of the total missed RMD's ASAP.

Then you need to file a separate 5329 form for each missed year along with the explanation.  Be sure to say that you have taken the shortfall.

You can get past years 5329 form here:

https://apps.irs.gov/app/picklist/list/priorFormPublication.html;jsessionid=K2afqLmfMnkOhovlwx7KAyGt...

From 5329 instructions:
Quote:
"Waiver of tax. The IRS can waive part or all of this tax if you can show that any shortfall in the amount of distributions was due to reasonable error and you are taking reasonable steps to remedy the shortfall. If you believe you qualify for this relief, attach a statement of explanation and file Form 5329 as follows.
1. Complete lines 52 and 53 as instructed.
2. Enter “RC” and the amount of the shortfall you want waived in parentheses on the dotted line next to line 54. Subtract this amount from the total shortfall you figured without regard to the waiver, and enter the result on line 54.
3. Complete line 55 as instructed. You must pay any tax due that is reported on line 55.
The IRS will review the information you provide and decide whether to grant your request for a waiver. "

Enter zero on line 55 - do  not pay the penalty.  In the unlikely chance the IRS denies the waiver they will send a bill.

[Anonymous]

your dad was required to take an RMD in 2012. if he didn't the beneficiary was required to take it.  can you explain why you did not"inherit" the IRA until 2015?   IRAs have a designated beneficiary and many have a secondary beneficiary in cases where the owner and primary beneficiary die.  

for 2012 if dad did not take an RMD for that year, the beneficiary should have taken it.

the rules for RMDS in subsequent tears would be based on the rules in effect in 2012.

[Tami71]

Thanks to both macuser_22 and HACKITOFF for your responses. You both are providing me invaluable information.

I found more records dating further back (2013) and found a 1099-R that was issued by Schwab, which probably was my first go-to investment firm to receive the money under the rush I felt. I now vaguely remember moving the $$ to a mutual fund firm in 2015.

I pulled up my 2013 tax records and found a 1099-R from my dad's annuity company that was filled - Box 7 included a code 4G and a checked IRA box. Unfortunately, my dad moved all his funds to this money-sucking annuity firm without my knowledge and too early for me to help him.

I've looked through all their correspondence to see if they had issued information about RMD responsibilities. I have no records receiving this information. Because of my distrust of their approach, I saved all records from them.

Because there were no directions related to this 1099-R, I assumed withdrawals fell according to my age and didn't even think I had obligations unless I made a withdrawal. 

Should I go back to this firm or should just proceed to resolve with filing with the IRS? Based on some other questions related to this topic in the community section, it appears that I needed to pull all the money within a five-year timeframe, which has passed.  Ugh.

What would you recommend as next steps that would protect me as best as possible? I feel I need more information to determine what to do and how to file for a waiver - but I'm still feeling there are gaps in what I need to know.

Again, thank you both for your help!

[macuser_22]

A code 4G would indicate an inherited employer plan such as a 401(k) that was rolled into an inherited IRA.   If the IRA/SEP/SIMPLE box checked then that would be an improper 1099-R.  A Traditional IRA can never have a code 4G.    The IRA box and code 4G are not comparable.

Since you mentioned an annuity then unless it was a qualified annuity held within an IRA it could not be t to in IRA.     In any event an inherited IRA can only be trustee-to-trustee transferred to a benificuary IRA held in the deceased name  with you as beneficiary.

RMD's on annuities held within IRA can be very difficult to calculate (if that is what it is) but that is not clear.

User @dmertz any suggestions?

[dmertz]

I agree, a Form 1099-R with codes 4 and G in box 7 issued to a non-spouse beneficiary can never have the IRA/SEP/SIMPLE box marked.  (A surviving-spouse beneficiary could conceivably receive such a Form 1099-R for a direct rollover from an inherited IRA to the surviving spouse's own 401(k) or similar qualified retirement plan, but I've never heard of that actually being done.)  Given the circumstances, my guess is that this was a non-reportable trustee-to-trustee transfer of an inherited IRA and the IRA custodian misused form 1099-R.  Despite the IRS issuing instructions in 1978 that such a transfer is non-reportable, many smaller IRA custodians make the mistake of trying to report it by misusing the codes for box 7 of a Form 1099-R as seems was probably done here.  This misuse of Form 1099-R does seem of have subsided somewhat recently but seemed much more common 5 years ago.

Assuming that the account was originally an IRA, you must make up any missed RMD that your father had not taken for 2012 and beneficiary RMDs beginning in 2013 based on your life expectancy in 2013, reduced by 1 each subsequent year if you were the beneficiary designated on the IRA or based on your father's life expectancy in the year of death, reduced by 1 each subsequent year if your father's estate was the beneficiary and you inherited the account through the estate.  You must also file a Forms 5329 for each year that you failed to take the RMD timely, as macuser_22 indicated.

IRA custodians are under no obligation to notify you of your responsibility to take RMDs from an inherited IRA the way they are for IRA participants.

Note that by operation of law the IRA became an inherited IRA for the benefit of the beneficiary upon your father's death.  The fact that it took until 2015 for the account to be officially titled as an inherited IRA doesn't change that.

[Tami71]

I'm so grateful for this community! I had to do further searching to verify my information and have completed 5329s for each year that needs to be addressed.

I found:

A) A full life expectancy table, 

B) End of year balances for each year, 

C) My tax rate for each of those years, and

D) My new calculated tax owed on the amount of distribution required for each year.

At this point, I have a few questions:

1) Rather than calculate the amount as I have above, how would the custodian's numbers differ? At a minimum, I think confirming my calculations would be prudent, but I'm curious about this point.

2) It's my understanding that at this time, I need to complete RMDs for each year. Should the process be to make separate RMDs? I ask this because I assume these RMDs will be posted in aggregate in a 1099-R they will issue for 2020.

3) Am I correct that the 2020 1099-R will post all these RMDs? If this is true, haven't I already paid the tax on this money with the effort I'm currently working on? How do I avoid paying a tax twice on these RMDs?

Thank you so much for this help, everyone. 

[macuser_22]

---

@Tami71 wrote:

B) End of year balances for each year, 

1) Rather than calculate the amount as I have above, how would the custodian's numbers differ? At a minimum, I think confirming my calculations would be prudent, but I'm curious about this point.

2) It's my understanding that at this time, I need to complete RMDs for each year. Should the process be to make separate RMDs? I ask this because I assume these RMDs will be posted in aggregate in a 1099-R they will issue for 2020.

3) Am I correct that the 2020 1099-R will post all these RMDs? If this is true, haven't I already paid the tax on this money with the effort I'm currently working on? How do I avoid paying a tax twice on these RMDs?

---

The RMD for each year is calculated on the year end value of the *previous* year.

#2)  It is only necessary to make one distribution of the aggregate total of all missed RMD's (the 2020 RMD must still be taken).   You will received a single 1099-R with the total.

#3) What do you mean?    How did you pay any tax if you have not taken the RMD.

[dmertz]

1.  The only thing that the custodian would be able to confirm is the calculation of the RMD from year-end balance for the preceding year and the appropriate divisor from the Single Life Expectancy Table in IRS Pub 590-B.  They may or may not be cooperative in doing so for the older RMDs.

2.  There is no real benefit from taking multiple distributions.  No matter how many you take in a single year from a particular account, they'll all be aggregated on a single Form 1099-R.  Just retain your records of the calculations used to come up with the total.

3.  Income taxes on these amounts have not yet been paid.  The distribution in 2020 must be included on your 2020 tax return and will factor into determining your overall tax liability for 2020.  Any amount that you choose to have withheld from the distribution for taxes (default 10%, 0% or more than 10%) will be credited on your 2020 tax return, reducing any balance due and any excess withholding or estimated tax paid will be refunded.  Just be sure that you either have enough withheld or pay enough in an estimated tax payment to avoid a tax underpayment penalty.

[Tami71]

Thanks to both Macuser_22 and dmertz for your responses. I've assumed that I needed to provide

1) Form 5329 for each year

2) Provide a letter explaining the reason for the oversight (waiver request), and 

3) Pay the tax amount I should have paid for each RMD

I looked at a YouTube https://www.youtube.com/watch?v=SRTkx_C6LoE

At 3:27, the presenter lists steps - the final step on her white board lists: "Pay any tax that would be due on the RMD along with the 5329. Do NOT pay the penalty."

I'm guessing that you both think this is incorrect information and that I wait to pay this RMD when I file my 2020 taxes. Am I correct in that I complete steps 1) and 2) and that's it?

Thanks so much.

[macuser_22]

You fill out the 5329 for for each year.   The penalty on line 55 must be ZERO.    You send NO payment with the 5329.  The tax will be paid on the 2020 distribution when you file your 2020 tax return in 2021.

See the 5329 instructions that I posted in an earlier post above.

(If someone tells you that you must pay the tax with the 5329 then they do not know what they are talking about.)

[Tami71]

THANK YOU so much for confirming that no payment is made at this point. And thanks for walking through this with me. I think I can get this to the end, now. 

Cheers!

[macuser_22]

I will add one caveat.    When there is a 1099-R with box 4 tax withholding the the IRS requires a copy be sent to them.  TurboTax complies by sending the 1099-R worksheet to the IRS, but the 2nd 1099-R does not have tax withholding to that worksheet is not sent to the IRS.

It is possible that the IRS computers that match the 1099-R submitted by the financial institution will be compared to the tax return and the box 1 amounts will not match (even though the 1040 line 4 does match - the IRS computers are not very smart) and the IRS will sent a letter thinking that you under reported income.  

A simple phone call to the number on that letter should take care of that should it happen.

To avoid any possibility of that happening at all, do not e-file but print and mail file and attach a copy of the actual 1099-R received from the financial institution that will match.     Printed and mailed tax returns do not contain any TurboTax 1099-R forms, only the 1040 form - you must attach the 1099-R copy and mail it.

[dmertz]

With regard to Forms 1099-R, the IRS Automated Underreporter (AUR) system generally kicks out a tax return for manual examination only if the amounts reported on Form 1040 lines 4a, 4b, 4c, 4d and 17 disagree with the amounts reported on the Forms 1099-R received by the IRS from directly from the payers.  Attaching Forms W-2 and 1099 are mainly done just to corroborate the amount shown on line 17, which is why only the details of those Forms 1099-R showing tax withholding are included in the e-file transmission.