Grappling with the required minimum distribution rule
Understanding the requirements in the IRA owner’s year of death.
July 23, 2012
If an IRA owner dies on or after his or her required beginning date, then a required minimum distribution to the extent unpaid to the IRA owner must still be paid for the year of the IRA owner’s death.
According to the IRS, an unpaid required minimum distribution for the IRA owner’s year of death must be paid to the IRA owner’s beneficiary.
The required minimum distribution and the unpaid required minimum distribution amount for the IRA owner’s year of death is based on the age that the IRA owner would have attained in the IRA owner’s year of death, had the IRA owner not died.
According to the IRS Final Regulations at Section 1.401(a)(9)-5, A-4(a),
[I]f an [IRA owner] dies on or after the required beginning date, the distribution period applicable for calculating the amount that must be distributed during the distribution calendar year that includes the [IRA owner’s] death is determined as if the [IRA owner] had lived throughout the year. Thus, a minimum required distribution, determined as if the [IRA owner] had lived throughout that year, is required for the year of the [IRA owner’s] death and that amount must be distributed to a beneficiary to the extent it has not already been distributed to the [IRA owner].
On the death of an IRA owner on or after the IRA owner’s required beginning date, there is a virtual certainty that there will be an unpaid required minimum for the IRA owner’s year of death because the IRA owner may take required minimum distributions on a monthly basis or wait until the end of the year to take his or her annual required minimum distribution.
Most IRA owners tend to look at the tax-deferred growth of the IRA and do not generally take [their] annual required minimum distributions during the first month or week of the calendar year. For that reason, practitioners must become aware of the unpaid required minimum distribution rule.
Example: IRA owner Marty died at age 75 on Oct. 15, 2011. He would have attained age 76 on Dec. 1, 2011. The designated beneficiary of his IRA is his wife, Judy. For the calendar year 2011, his required minimum distribution for the calendar year 2011 based on age 76 is $64,000. Prior to his date of death, Marty received $24,000 of his required minimum distribution for the calendar year 2011. The unpaid required minimum distribution for the calendar year 2011 as of the date of Marty’s year of death is $40,000. This unpaid required minimum distribution of $40,000 must be paid to Judy as soon as possible after Marty’s death if she is told about the rule.
In the event that the IRS sends out a notice to Marty regarding his failure to receive his required minimum distribution of $64,000 for 2011, then the response to the IRS from Judy should be that, because Marty died on Oct. 15, 2011, she then took out the required minimum distribution shortfall of $40,000 as soon as possible after she became aware of it. Judy should also indicate to the IRS when she became aware of the shortfall, who brought it to her attention, and that she reported the amount in the calendar year that she received it. If she found out about it in 2012 and received it in 2012, then she should indicate to the IRS that she reported it on her 2012 income tax return. Under these circumstances, the IRS should waive the 50 percent penalty on the shortfall of $40,000.
As the surviving spouse, Judy may not roll over or transfer the unpaid required minimum distribution amount of $40,000 to her own IRA or to a spousal rollover IRA. An unpaid required minimum distribution amount may not be rolled over under the IRS rules. In the event that Judy erroneously transfers or rolls over the $40,000 shortfall to an IRA in her name, then certain timely corrective action must be taken by her in order to avoid or minimize significant tax sanctions and penalties with respect to the erroneous rollover transaction.
According to IRS rules, a required minimum distribution is not eligible for a rollover. In addition, the first monies taken out during a given year from the traditional IRA are considered to be applied toward the required minimum distribution amount for that year.
This article has been excerpted from The IRA Distribution Rules: IRS Compliance and Audit Issues. The publication is available on CPA2Biz.
Seymour Goldberg, CPA, J.D., MBA, is a senior partner in the law firm of Goldberg & Goldberg, P.C., in Woodbury, N.Y. He is professor emeritus of law and taxation at Long Island University and is the recipient of the American Jurisprudence Award in Federal Estate and Gift Taxation from St. John’s University School of Law. He is the recipient of outstanding discussion leader awards from both the AICPA and the Foundation for Accounting Education.