Non Spouse IRA Beneficiary Rules Question

[CALTCAgent]

Hello,

A Non Spouse Beneficiary inherited an IRA in which the owner died after the required beginning date for RMD's.

The beneficiary then goes past the IRS deadline of December 31st of the year after the date of death for RMD's without taking any RMD's or choosing a settlement option. They were out of the country and notified the insurance company and therefore did not choose a settlement option.

If they miss this RMD deadline do they have to now lump sum out the money ?

I would think they would just be subject to the 50% penalty for missing the RMD and would be able to keep the money in a qualified account.

I am getting conflicting reports at the insurance company.

 

[DHK]

I believe you are correct - it's just the 50% penalty on the amount that should've been distributed. However, if you skip to the bottom, there may be a way to waive the tax, if they are taking actions to remedy the situation.

https://www.irs.gov/retirement-plan...nt-topics-required-minimum-distributions-rmds

Required minimum distributions after the account owner dies
For the year of the account owner’s death, use the RMD the account owner would have received. For the year following the owner’s death, the RMD will depend on the identity of the designated beneficiary.

Calculating required minimum distributions for designated beneficiaries
Beneficiaries of retirement accounts and IRAs calculate RMDs using the Single Life Table (Table I, Appendix B, Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)). The table shows a life expectancy based on the beneficiary’s age. The account balance is divided by this life expectancy to determine the first RMD. The life expectancy is reduced by one for each subsequent year.

Individual beneficiaries other than a spouse can:
withdraw the entire account balance by the end of the 5th year following the account owner’s death, if the account owner died before the required beginning date, or
calculate RMDs using the distribution period from the Single Life Table based on:
If the owner died after RMDs began, the longer of the:
beneficiary’s remaining life expectancy determined in the year following the year of the owner’s death reduced by one for each subsequent year or
owner’s remaining life expectancy at death, reduced by one for each subsequent year

If the account owner died before RMDs began, the beneficiary’s age at year-end following the year of the owner’s death, reducing the distribution period by one for each subsequent year.

See Publication 590-B, Distribution from Individual Retirement Arrangements (IRAs), for details on calculating required distributions for beneficiaries.

https://www.irs.gov/publications/p590b/ch01.html#en_US_2015_publink1000230753

IRA Beneficiaries

The rules for determining required minimum distributions for beneficiaries depend on the following.

The beneficiary is the surviving spouse.

The beneficiary is an individual (other than the surviving spouse).

The beneficiary is not an individual (for example, the beneficiary is the owner's estate). (But see Trust as beneficiary , later, for a discussion about treating trust beneficiaries as designated beneficiaries.)

The IRA owner died before the required beginning date, or died on or after the required beginning date.

The following paragraphs explain the rules for required minimum distributions and beneficiaries.

If distributions to the beneficiary from an inherited traditional IRA are less than the required minimum distribution for the year, discussed in this chapter under When Must You Withdraw Assets? (Required Minimum Distributions), you may have to pay a 50% excise tax for that year on the amount not distributed as required. For details, see Excess Accumulations (Insufficient Distributions) under What Acts Result in Penalties or Additional Taxes? later in this chapter.

Tax on excess. If distributions are less than the required minimum distribution for the year, discussed earlier under When Must You Withdraw Assets? (Required Minimum Distributions) , you may have to pay a 50% excise tax for that year on the amount not distributed as required.

Request to waive the tax. If the excess accumulation is due to reasonable error, and you have taken, or are taking, steps to remedy the insufficient distribution, you can request that the tax be waived. If you believe you qualify for this relief, attach a statement of explanation and complete Form 5329 as instructed under Waiver of tax in the Instructions for Form 5329.

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BTW, GOOD question! I certainly had to look that one up myself.

 

[walthamny]

You are looking for tax advice. The insurance company can not give you that so thats why they are confused on what to tell you. This type of problem happens frequently with qualified plans. IRS is used to this sort of problem. If you file a paper return or if you have already filled, you have to 1040X and correct the problem. IRS will waive the penalty in almost all cases. If they deny (which I have never seen happen), you can contact a CPA to see if it would make sense for a private letter ruling.

This sort of problem happens more often than you think. When a non spouse is a beneficiary, the insurance company has to locate them. And for many years insurance companies were not in a hurry to find the beneficiary and start making RMD payments. They preferred to send a letter once to an old address and keep collecting fees on the annuity until someone showed up.

This question gets asked a lot on Ed Slott's forum

 

[CALTCAgent]

You are looking for tax advice. The insurance company can not give you that so thats why they are confused on what to tell you.

Thanks for the response and from DHK also.

Shouldn't the insurance company tell me if they will accept this as qualified or non qualified ?

One time they say its NQ on another call it is Q.

Thanks!

 

[scagnt83]

Thanks for the response and from DHK also.

Shouldn't the insurance company tell me if they will accept this as qualified or non qualified ?

One time they say its NQ on another call it is Q.

Thanks!

You need to move up a level or two from the person(s) you are speaking to. Ask if they can get an opinion from someone on the Advanced Planning team. Often you can get contact info for them from the agent website.

Even just ask to speak to a supervisor or manager. Tell them about the conflicting answers and ask them to have someone verify the correct answer.


Inside Sales reps are usually fine for product info. But when it comes to advanced tax issues you need to get to the experts. Inside sales reps are not the ones to ask those questions.

 

[CALTCAgent]

You need to move up a level or two from the person(s) you are speaking to. Ask if they can get an opinion from someone on the Advanced Planning team. Often you can get contact info for them from the agent website.

Even just ask to speak to a supervisor or manager. Tell them about the conflicting answers and ask them to have someone verify the correct answer.


Inside Sales reps are usually fine for product info. But when it comes to advanced tax issues you need to get to the experts. Inside sales reps are not the ones to ask those questions.

Thanks for the response!

I have been trying to do this. They are telling me no supervisor will talk to me and nobody will correspond with me.

Maybe I can try the website and look for someone higher up.

To be more clear, they are saying that the settlement option must be taken by December 31st of the year following the date of death. If this doesn't hapenn they cannot take the lump sum and stay in qualified account.

It is only a lump sum payment now.

 

[DHK]

I wouldn't take that kind of BS treatment from any company. FORCE the issue! Sometimes it just doesn't pay to be nice. You might have to play a little hardball:

"Look, I don't understand why you aren't allowing me to talk to someone regarding this contract and why you are telling me things that contradict the IRS publication 590-b. And I am requesting to talk to someone in a supervisory capacity or advanced underwriting team to help me understand this contract."

"Now, so far, I've contacted your company 'x' times, and I haven't gotten satisfactory answers to my questions. If I can't get answers that satisfy me, then I have no choice but to ADVISE MY CLIENT to SUE "POS Insurance Company", file a complaint with my state department of insurance, and list you and each person I've spoken to individually in the complaint for obstructing my ability to provide good service and advice to the contract's beneficiaries with whom we share a FIDUCIARY LIABILITY to the BENEFICIARIES of this contract that I am trying to uphold.

Now, are you going to put me through? Or am I going to have to advise the client to sue and file a complaint with the state?"

You can also contact "[email protected]".

List names, extensions, and answers you have been receiving and how they are contradicting the IRS rules and that you need appropriate answers on how to properly advise the client and/or specific contract language in the annuity contract that locks the client into taking a lump-sum settlement.


Do I dare ask which company is doing all this BS to you?

 

[CALTCAgent]

I wouldn't take that kind of BS treatment from any company. FORCE the issue! Sometimes it just doesn't pay to be nice. You might have to play a little hardball:




You can also contact "[email protected]".

List names, extensions, and answers you have been receiving and how they are contradicting the IRS rules and that you need appropriate answers on how to properly advise the client and/or specific contract language in the annuity contract that locks the client into taking a lump-sum settlement.


Do I dare ask which company is doing all this BS to you?

Thanks good advice!

They have me on recorded lines getting lets say demonstrative. I have hours worth of calls and am totally stonewalled.

 

[DHK]

It may also be a good idea for the beneficiaries to use their Estate Attorney to draft a letter indicating that the insurance company should work with you or face a suit for violation of their fiduciary duty.

 

[walthamny]

It may also be a good idea for the beneficiaries to use their Estate Attorney to draft a letter indicating that the insurance company should work with you or face a suit for violation of their fiduciary duty.

Sorry for being picky here but the insurance does not have a fiduciary duty to help. If they did, there would thousand of lawsuits over unclaimed life insurance payouts. Most likely under each State insurance laws they have to just make a reasonable attempt to answer inquiries and respond to any legal requests. They will respond to an estate lawyer but not because they have any fiduciary duty.