Addressing IRA RMD Requirements Upon Death of an Owner
If an IRA owner who is taking required minimum distributions (RMDs) dies before withdrawing their annual RMD, the RMD remains subject to the same withdrawal rules. This is a daunting prospect for an estate administrator or a beneficiary, as they generally have little time to act in determining the RMD and making that timely withdrawal.
The RMD becomes the responsibility of the estate administrator or beneficiary upon the death of the account owner. If the RMD (or remaining annual amount) is not withdrawn before the end of the same calendar year, it may be subject to substantial penalties. This applies to an owner who passes late in the year, with an RMD requirement for that calendar year.
There are 2 components to rectifying the missed RMD; which are the correcting distribution or withdrawal, and the penalty relief.
Correcting distributions are addressed by beneficiary type:
If there is more than one individual beneficiary, the year-of-death RMD may be split in any manner amongst the beneficiaries. This also applies to the payout of the IRA funds in entirety. So long as the beneficiary ownership percent or amount is proper, they may choose to take a lump-sum or establish periodic payments. The RMD amount is covered as long as the payments (in any manner) satisfy the year-of-death requirement.
Estate as Beneficiary:
If the estate is the beneficiary of the IRA and RMD, the required payment must be corrected/withdrawn on behalf of the estate. If the RMD is erroneously paid to the decedent, the proper administration is to return the payment to the IRA and re-issue to the estate.
Penalty relief requires filing of tax forms:
IRS Form 5329 is the tax form to request a waiver of the RMD penalty. In the past, not filing Form 5329 for penalty relief meant that the general three-year statute of limitations applied. Individual retirement account penalties for missed RMDs that were 50% (now 25%/10%), could be assessed years later, plus interest and non-payment penalties.
SECURE Act 2.0 has provided relief by adding a statute of limitations based on when the individual federal income tax return (Form 1040) was filed, even if Form 5329 was not filed at that time. The new statute of limitations applies to missed RMDs (3 years).
If you have any questions, or need any assistance with RMDs or decedent tax returns, please contact Accavallo & Company, LLC office at (203) 925-9600 and we would be happy to assist you.