I can’t seem to find someone who can answer this for me, so I’m hoping you can help.
My grandmother died last June when she was 80 years old. My mom inherited the IRA and named me as a beneficiary in case something happened to her. Then in early January my mom suddenly died. If she had survived, she would have turned 59 in December.
The only paperwork I can find is a letter from the bank reminding Grandma that she needed to withdraw $12,275.50 from her IRA last year and a statement dated 12/31/2012 that shows $9,180 was taken out near the end of last year. That must have been done by my mom.
I’m turning 21 this year and about to start a job that pays pretty good. I’d like to leave the investments in grandma’s IRA, maybe until I’m retired. Over time, I’m sure that would grow into a nice next egg.
Can I do this?
Thanks for your help,
Please accept my condolences for losing two close family members in such a short time span.
The rules that govern inherited IRAs can be a bit confusing and the penalty for making a mistake is pretty severe- 50%. So, you are wise to check before you make a move that could be costly.
Because there have been multiple beneficiaries of this IRA, your situation is more complex than it appears. It will be easier to understand what needs to be done- and why- if I walk you through the various components.
Clearly, your grandmother had a Traditional IRA as opposed to a Roth IRA because the custodian of this account (her bank) sent her a reminder about taking her annual withdrawal. In technical terms, this is called your Required Minimum Distribution, or RMD. There is no required RMD from a Roth IRA.
The owner of a traditional IRA must begin withdrawing their RMD each year starting the year they reach age 70. The amount you have to withdraw each year depends upon your age and the IRA amount You can always take out more than the minimum amount, but if you withdraw less than the RMD, there is a 50% penalty on the shortfall. Here’s what the math looks like:
Annual RMD= IRA Value on Dec.31 of previous year / Life Expectancy Factor
Since the year-end statement from the bank shows that the only withdrawals from the IRA occurred months after your grandmother had died, clearly she did not take her 2012 RMD. In this case, the person who inherited the account- your mother- was required to withdraw the $12,275.50 by Dec.31.
I assume your mom was unaware of this. Although she did take some money out of the IRA last year, the total was $3,095.50 less than required and is subject to the 50% penalty.
According to IRA expert Barry Picker, a partner in the CPA firm Picker and Auerbach in Brooklyn, N.Y., the $9,180 withdrawn by your mom last fall needs to be reported as income on her 2012 tax return.
As the “successor” beneficiary, Picker says you are obligated to withdraw the remainder of last year’s RMD. You will report the $3,095.50 when you file your 2013 tax return next year.
In addition, you must also take an RMD for this year and each year hereafter. However, since you are the “successor” and not the primary beneficiary, you must use your mom’s life expectancy and determine the annual required minimum distribution as if she were still alive.
To calculate this, you need two pieces of information: the value of the IRA at the end of last year (from the year-end statement the bank provided) and the “life expectancy factor” of a 59 year-old, the age your mom would be this year.
You can find the life expectancy factor in IRS Publication 590 which is available online here. Next, go to “Appendix C, Table 1, Single Life Expectancy.” Scroll down and you will find that the factor for a 59 year old is 26.1. Here’s the math:
2013 RMD= IRA Value on Dec.31, 2012 / 26.1
Each year you simply divide the value of the IRA at the end of the previous year by the appropriate life expectancy factor. You never have to look this up again. Instead, the correct method is to subtract 1.0 from the denominator each year. For instance, next year’s life expectancy factor will be 25.1. In 2015, it will be 24.1 and so forth.
Now let’s circle back to the issue of the penalty on the $3,095.50 that should have been withdrawn last year. According to Picker, since your mom was the legal beneficiary of the IRA at the end of last year, it was her responsibility to “clear up” the RMD issue. In his words, “the penalty should be on her return for 2012.” This comes to $1,547.75!
However, under the circumstances, Picker is confident you can get this waived. The IRS has considerable leeway to forgive the penalty on an RMD mistake. When your mom’s 2012 tax return is submitted, you should attach IRS Form 5329, which is available here. Follow the instructions in Part VIII. It as explains, you need to report the under-withdrawn amount. However, you can then attach a separate piece of paper on which you explain the circumstances that led to last year’s RMD being overlooked: your grandmother was ill, so she didn’t withdraw it; your mom was very sick at the end of the year, so she couldn’t take it, etc.
I’m sorry you cannot leave the money in your grandmother’s IRA for your own use in retirement. However, there is a way to accomplish this: simply invest each year’s RMD in an IRA in your own name! There may be times when it will be tempting to just spend the annual withdrawal, but think how happy your grandmother and mom would be to know that you are using this money in the way it was originally intended: to provide additional retirement income security for a beloved family member.
Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.
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