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Inherited an IRA with Missed RMDs? This Week’s Q&A

This week’s Slott Report Mailbag looks into missed RMDs, inherited IRAs, and QDROs.  As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure.

Question:

Have you ever encountered a situation where the beneficiary of a deceased IRA never took the RMD dating back to 2006? Is there a possible resolution?

Bruce

Answer:

This is a situation that happens all too frequently. We covered the options in depth in the February 2017 issue of our newsletter. Here are the basics. You first have to see whether the beneficiary was named on the beneficiary form or if they inherited through the estate. If it is the estate, then the RMD options are those for a non-designated beneficiary.

If the beneficiary was named on the form, then you have to see what the IRA agreement defaults to – either 5-year payout or life expectancy. If it is the 5-year payout, then the account must be emptied by the end of the fifth year after the account owner’s death. In your case, that was probably 2011 and the RMD for that year was the entire account balance. If it is life expectancy, then you can calculate and take all the past missed RMDs and continue with RMDs each year going forward.

Question:

In researching an issue, I came upon a posting by Ed Slott and Company, LLC. Here is my question:

May all, or a portion, of an inherited IRA be transferred by a QDRO, the tax liability thus being transferred to the transferee spouse?   If so, is the RMD determined by the life expectancy of the transferor spouse (i.e. the IRA beneficiary spouse) or by the life expectancy of the transferee spouse?

I appreciate your guidance here.  Thanks. Fredric D. Rubin, Esq.

Answer:

An inherited IRA can be split in a divorce. A QDRO is only used to divide an employer plan as part of a divorce. The divorce decree or separation agreement is used to divide an IRA. These documents allow the beneficiary to transfer inherited IRA assets to the ex in a tax-free, direct transfer. When a non-spouse beneficiary inherits an IRA there is never a reset of the RMD calculations. They will continue to be based on the original life expectancy factor, reduced by one for each year, no matter who is taking the distributions – the beneficiary, a successor beneficiary, etc. The beneficiary gets no break in the year of the transfer. The RMD is based on the prior year-end account balance and is not adjusted for any transfers to the ex. The ex’s first RMD will be in the year after the transfer is received by the ex.