How to Handle Year-of-Death RMDs
By Alayna Drope, CIP, CHSP
We have a Traditional IRA owner who died this year before taking his RMD. How should the RMD be satisfied for the year?
When an account owner dies before satisfying a required minimum distribution (RMD) for the year, the beneficiaries must distribute the remaining RMD amount by December 31 of the year of death. If there are multiple beneficiaries, each beneficiary is responsible for removing their proportional share of the total RMD amount in the year of death; one beneficiary cannot satisfy the entire RMD amount.
For example, if there are four beneficiaries sharing equally in an IRA, each beneficiary inherits 25 percent of the IRA. If the RMD amount is $800, each beneficiary would be responsible for 25 percent of the RMD, $200 in this case. Even if one beneficiary takes $800, the other three are still responsible for taking $200.
If a trust or estate is the IRA beneficiary, that entity is responsible for taking the year-of-death RMD.
How should the year-of-death RMD be reported?
Financial organizations must report the RMD as a death distribution under each beneficiary’s name and Social Security or tax identification number (TIN) if the beneficiary is a trust or estate. Distributions to Traditional IRA beneficiaries are taxable—any distributed pretax assets (reduced by basis, if any) are included in the beneficiary’s taxable income for the year of the distribution. Regardless of the beneficiary’s age, he will not be subject to the 10 percent early distribution penalty tax—which generally applies to IRA owners under the age of 59½—because death is an exception to the penalty tax.
Why wouldn’t we report the year-of-death RMD to the IRA owner since it is the IRA owner’s RMD?
When an IRA owner dies, his designated beneficiary or beneficiaries are entitled to the remaining IRA balance. You may not knowingly pay, or report a distribution as paid, to an individual who is deceased. You must report it as payable to the actual recipient of the distribution, the beneficiary. According to the Instructions for Forms 1099R and 5498, “If you make a distribution to a beneficiary, trust, or estate, prepare Form 1099-R using the name and TIN of the beneficiary, trust, or estate, not that of the decedent.”
By when must a beneficiary satisfy the year-of-death RMD if the IRA owner died at the end of the year?
No matter what time of the year the IRA owner died, if it was before taking the RMD for the year, the beneficiaries will still be responsible for satisfying their portion of the RMD by December 31 of the year of death. There is no extension of time for distributing year-of-death RMDs.
If an IRA owner died late in the year and the RMD is not removed by December 31, an excess accumulation penalty—50 percent of the year’s RMD—will apply. The beneficiary will need to complete IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to report and pay the penalty, or to apply for an IRS penalty waiver.
Do we have to move the beneficiary’s share of the assets to an inherited IRA before distributing the year-of-death RMD?
No, that is not a requirement. But to ensure that an RMD that is paid out after the IRA owner’s death is reported in the beneficiary’s name and Social Security number or TIN and not the IRA owner’s, many financial organizations first move the assets to an inherited IRA. The capabilities of your organization’s operating and transaction reporting systems will likely dictate your procedures for properly reporting a year-of-death RMD.
