Individual Retirement Accounts: Who Takes Decedent’s Year of Death Required Minimum Distribution? | Wolters Kluwer
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  • Individual Retirement Accounts: Who Takes Decedent’s Year of Death Required Minimum Distribution?

    Philip Royce Onward

    Phil Royce, Consultant, Tax Advantaged Accounts, Wolters Kluwer

    Published December 14, 2017



    Overview

    Owners of traditional [including simplified employee pension (SEP)] and Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs are required to start taking required minimum distributions (RMDs) by their required beginning date (RBD). That date is April 1st of the year after an IRA owner attains age 70½. Starting with an IRA owner’s 70½ year, and each year thereafter, the IRA owner has an amount that must be taken in order to satisfy the RMD rules.

    In the case of an IRA owner’s death after his/her RBD, if that individual fully satisfied his/her RMD prior to death no further amount needs to be taken that year, however if he/she did not fully satisfy his/her RMD prior to death, it must still be taken.

    Taking the RMD for the Year of Death

    In a case where an IRA owner only took part of his/her RMD prior to death, or he/she did not take any amount at all, who is responsible for taking the undistributed RMD amount? Is it the IRA owner even though he/she is deceased, the IRA owner’s estate, or the beneficiary(ies) of the IRA?

    The Rules

    Internal Revenue Code (IRC) Section 408(a)(6) provides that IRAs are subject to the required distribution rules of IRC Section 401(a)(9) (i.e., employer plan RMD rules) and the Treasury Regulations thereunder. As you will see below, unless an IRA owner took his or her RMD in full prior to his/her death, any remaining amount must be taken by the IRA beneficiary(ies) and reported in the recipient beneficiary name(s) and TIN(s).

    Treasury Regulation Section 1.408-8 states that the language in the RMD regulations of Section 401(a)(9) applies to IRAs:

    Q-1. Is an IRA subject to the distribution rules provided in section 401(a)(9) for qualified plans?

    A-1. (a) Yes, an IRA is subject to the required minimum distribution rules provided in section 401(a)(9). In order to satisfy section 401(a)(9) for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2003, the rules of §§1.401(a)(9)-1 through 1.401(a)(9)-9 and 1.401(a)(9)-6T for defined contribution plans must be applied, except as otherwise provided in this section. For example, whether the 5-year rule or the life expectancy rule applies to distributions after death occurring before the IRA owner’s required beginning date is determined in accordance with §1.401(a)(9)-3 and the rules of §1.401(a)(9)-4 apply for purposes of determining an IRA owner’s designated beneficiary. Similarly, the amount of the minimum distribution required for each calendar year from an individual account is determined in accordance with §1.401(a)(9)-5. For purposes of this section, the term IRA means an individual retirement account or annuity described in section 408(a) or (b). The IRA owner is the individual for whom an IRA is originally established by contributions for the benefit of that individual and that individual’s beneficiaries.

    (b) For purposes of applying the required minimum distribution rules in §§1.401(a)(9)-1 through 1.401(a)(9)-9 and 1.401(a)(9)-6T for qualified plans, the IRA trustee, custodian, or issuer is treated as the plan administrator, and the IRA owner is substituted for the employee.

    Treasury Regulation Section 1.401(a)(9)-5 Q&A-4(a) provides that for the year of an IRA owner’s death, the RMD is calculated as if the IRA owner had lived throughout the year, and if an IRA owner has not taken his/her RMD, the beneficiary of the IRA must take the RMD.

    Q-4. For required minimum distributions during an employee’s lifetime, what is the applicable distribution period?

    A-4. (a) General rule. Except as provided in paragraph (b) of this A-4, the applicable distribution period for required minimum distributions for distribution calendar years up to and including the distribution calendar year that includes the employee’s date of death is determined using the Uniform Lifetime Table in A-2 of §1.401(a)(9)-9 for the employee’s age as of the employee’s birthday in the relevant distribution calendar year. If an employee dies on or after the required beginning date, the distribution period applicable for calculating the amount that must be distributed during the distribution calendar year that includes the employee’s death is determined as if the employee had lived throughout that year. Thus, a minimum required distribution, determined as if the employee had lived throughout that year, is required for the year of the employee’s death and that amount must be distributed to a beneficiary to the extent it has not already been distributed to the employee.

    Tax Reporting

    Payment of the year-of-death RMD to a beneficiary is reported in the beneficiary’s name and TIN.

    From the Internal Revenue Service (IRS) Instructions for Forms 1099-R and 5498

    Beneficiaries: 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. If there are multiple beneficiaries, report on each Form 1099-R only the amount paid to the beneficiary whose name appears on the Form 1099-R, and enter the percentage in box 9a, if applicable.

    Use IRS Distribution Code 4 in box 7 of Form 1099-R.

    Conclusion

    IRA beneficiaries and their advisors are often confused about the IRA death distribution rules. Remember to follow the written guidance provided in the law (i.e., the Internal Revenue Code), Treasury Regulations, and IRS reporting instructions when handling these situations.

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