Required Minimum Distributions After IRA Owner or Plan Participant Dies
By Christle Johnson, CIP, QKA
Are distributions required in the year that an IRA owner or retirement plan participant dies? Maybe. Will your beneficiary clients know that? Maybe not. Many IRA and retirement plan beneficiaries are not aware of the distribution requirements after an account owner has died, and how the requirements apply to them. Without this knowledge, your beneficiary clients could face unexpected penalty taxes. And your organization could face unexpected questions and complaints.
Required Beginning Date
IRA owners and employer-sponsored retirement plan participants generally must begin receiving annual distributions—required minimum distributions (RMDs)—in the year that they turn age 70½. An RMD is the minimum amount that an account owner must receive from an IRA or retirement plan each year. The IRS requires that RMDs be calculated separately for each IRA and retirement plan.
If the account owner dies before his required beginning date (RBD) for RMDs, no distribution is required for the year of death. If the account owner reached his RBD and did not satisfy his RMD before death, the RMD must be paid to the beneficiary(ies) by December 31 of the year of death.
For Traditional and SIMPLE IRA owners, the RBD for RMDs is April 1 of the year following the year the account owner turns age 70½.
The RBD for retirement plan participants is April 1 of the calendar year following the later of
the calendar year in which the participant attains age 70½, or
the calendar year in which the participant retires from employment with the employer maintaining the plan (plan permitting).
Delaying the RBD until actual retirement is not an option for retirement plan participants who own more than five percent of the business for which the plan is established. Also, delaying the RBD is only an option if the plan document allows for this provision.
Year of Death
If an account owner dies before satisfying his RMD, the beneficiary must distribute any remaining RMD amount by December 31 in the year of death. If the account owner had set up scheduled payments, the financial organization or employer must stop these payments upon the account owner’s death; the beneficiaries become owners of the assets at the point of death, and distributions after death must be paid to the beneficiaries.
If there are multiple beneficiaries, each beneficiary is responsible for removing her portion of the RMD amount in the year of death—one beneficiary cannot satisfy the entire RMD amount.
Financial organizations and employers must report the RMD on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., as a death distribution under each beneficiary’s name and Social Security number, entering code 4, Death, in Box 7.
Beneficiaries ultimately are responsible for taking RMDs timely. A 50 percent excess accumulation penalty tax applies to the amount that should have been taken by December 31 in the year of death but was not. Beneficiaries should use IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to report this penalty tax. Sometimes beneficiaries do not come forward by the RMD deadline. They can apply for a waiver of the penalty tax by attaching a letter of explanation with Form 5329. If the IRS agrees that the mistake was because of reasonable error, it may waive the penalty.
Years After Death
Beneficiaries may have a variety of distribution options, as defined in the IRA or retirement plan documents, but when the account owner dies on or after his RBD, at a minimum, his beneficiary(ies) must continue annual distributions, or single life expectancy (SLEs) payments, beginning after the year of death. IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), explains SLEs and contains the Single Life Expectancy Table, which provides the SLE factor used to calculate SLE amounts.
Better Customer Service
Regardless of when an account owner dies, distributions will need to be taken at some point. Making your beneficiary clients aware of the rules up front will not only help them avoid penalty taxes, but help you provide better customer service.