Since I've received a number of emails from readers about a time-sensitive issue related to inherited IRAs, I'll return to 401(k) questions next week.
Take this situation: You are the beneficiary of an IRA, having inherited it from someone who was taking RMDs (required minimum distributions) from the IRA before passing away in 2021. If the RMDs were not fully satisfied in 2021, you, the beneficiary, have to take action before Dec. 31, 2021 -- or face a hefty penalty.
Since custodians hold IRA accounts, you need to know their procedures when someone dies. While I turned to Fidelity for guidance, this discussion should help you get answers from your respective custodian. Before we begin, I caution you to consult with your tax adviser before taking any action.
We'll use the example of a woman in her 80s passing away in early December, leaving a Fidelity IRA for her daughter, "Jan," who is the sole beneficiary.
Jan calls Fidelity and fills out an online form available at tinyurl.com/58p2tj3u to report the death.
That puts in motion a verification process for the custodian to make sure that Jan is, in fact, a beneficiary. Until that verification is complete, no account or personal information can be discussed -- and no action can be taken by the beneficiary to meet a Dec. 31 deadline, if it applies to this particular situation.
The Dec. 31 deadline comes into play when the deceased's final RMDs are not completed for the year of death.
Take this example: Jan's mom's 2021 RMD was $66,000, but she withdrew only $30,000, leaving a shortfall of $36,000.
Who is responsible to take action if that happens? In this case, it's Jan. As provided in IRS Publication 590-B (tinyurl.com/2u5seew3), "the IRA beneficiaries are responsible for figuring and distributing the owner's required minimum distribution in the year of death."
If the RMD shortage is not withdrawn before year-end, Jan may be subject to a tax penalty (an excise tax on "excess accumulations"). For example, if the shortfall in 2021 was $36,000, the penalty would be $18,000 (50% of the shortfall).
While Dec. 31 is the deadline for taking that withdrawal, in reality, the beneficiary sometimes can't arrange for that final RMD to be withdrawn in time.
Jan's tax adviser needs to step up to see about a possible waiver of the penalty for "reasonable cause," which would be documented by Jan on lines 52 through 55 of IRS Form 5329, "Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts" (tinyurl.com/m8tcmt6b). The instructions for Form 5329 (tinyurl.com/2p8sdzms) go through "Waiver of tax for reasonable cause," detailing how to request a waiver of the excise tax. The IRS will review and then notify Jan whether it accepts or denies the request.
For more information on the subject, Fidelity offers online resources related to losing a loved one (tinyurl.com/2p8vuhh2 and tinyurl.com/2p9yjvta) and options for inherited IRAs (tinyurl.com/3jp7622b).
The topic of inherited tax-deferred accounts is complex. This is but one issue that comes up. How the beneficiary handles RMDs of his or her own has changed dramatically for deaths occurring after 2019 -- a topic for a later column.
If you have questions about this or other topics, send them to me at firstname.lastname@example.org. Please include the state you live in. While I can't respond to all such correspondence, I do read them and consider questions for columns.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (email@example.com). Please visit www.juliejason.com.
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