“Makeup” required minimum distributions salvage lifetime payouts to nonspouse IRA beneficiary
Mike Habib, EA
myIRSTaxRelief.com
A private letter ruling allows the nonspouse beneficiary of an IRA to salvage lifetime payouts even though she failed an essential rule requiring distributions to begin by the end of the year following the year of the IRA owner’s death. She made up missed annual required minimum distributions (RMDs) and paid a penalty excise tax, but by doing so she avoided a tough 5-year payout rule.
Background. If an IRA owner dies before his required beginning date (RBD), namely Apr. 1 of the year following the year in which age 70 1/2; is attained, then as a general rule his entire interest must be distributed within 5 years of his death. (Code Sec. 401(a)(9)(B)(ii)) However, if any part of the IRA is (1) payable to (or for the benefit of) a designated beneficiary, (2) that part is to be distributed under regs over the life or life expectancy of the designated beneficiary, and (3) the distributions begin not later than 1 year after the date of the deceased’s death (or a later date as prescribed by regs), then that part is treated, for Code Sec. 401(a)(9)(B)(ii) purposes, as paid out when distributions commence. (Code Sec. 401(a)(9)(B)(iii))
Reg. § 1.401(a)(9)-3, Q&A 3(a), says that where there’s a nonspouse beneficiary for the IRA (or a qualified plan account), in order to satisfy the life expectancy payout rule in Code Sec. 401(a)(9)(B)(iii), “distributions must commence on or before the end of the calendar year immediately following the calendar year in which the [IRA owner or employee] died.”
The determination of whether the five-year or lifetime payout rule applies depends on the provisions of the IRA. It may be silent as to which rule (5-year or lifetime payout) applies, specify which rule applies, or it may allow the owner (or beneficiary) to elect which rule applies. (Reg. § 1.401(a)(9)-3, Q&A 4)
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