By Andy Ives, CFP®, AIF®
Client passed in the middle of December 2018, but did not take her RMD. We are setting up beneficiary IRA accounts. We will be moving assets over to the beneficiary IRA accounts and then the beneficiary will take the RMD distribution. Should they take the 2018 distribution that was due and then take an additional distribution during 2019 based on their life expectancy? Should they do anything to explain the 2018 RMD taken in 2019?
Based on the wording of your question, I am assuming the beneficiaries of the IRA are non-spouse beneficiaries and are younger than the original account owner. If this is the case, then Step One is to take her RMD for 2018. These funds will be payable to the beneficiaries. Since the 2018 RMD was not taken by December 31 of last year, it will be a missed RMD and potentially subject to a 50% penalty. The beneficiary pays the penalty by filing Form 5329 as an attachment to their federal income tax return.
However, if the missed RMD is the result of a reasonable error and steps have been taken to correct it, the 50% penalty may be waived by the IRS. Form 5329 instructs the taxpayer to not pay the penalty if they are requesting a waiver. The beneficiaries should attach a letter to Form 5329 and explain why the RMD was missed and the steps taken to correct the shortfall.
Step Two is set up the properly-titled beneficiary IRAs before December 31 of the year after death (2019). As long as the beneficiary accounts are established before December 31, 2019, then each beneficiary will be able to use their own life expectancy for their 2019 RMD. They will use their factor from the Single Life Expectancy Table to calculate their RMD for this year and will subtract one from that factor for each year thereafter.
Ed and Staff,
Thanks for the QCD article last week. It was informative and helpful. Early last week I chatted with an IRA custodian’s QCD department. My situation is: client turns 70 in April of this year (2019) and 70 ½ in early October. The custodian said I could process the QCD any time in 2019. They said it would apply to the RMD for 2019 and we would defer the balance of the RMD into 2020 when she is retired. Here are the specifics:
Intended QCD: $3,000
2019 RMD Deferred to 2020: $32,000
Could you get me up to speed on the correct method? Also, could she take additional partial distributions of the above $32,000 in 2019 and take the balance in 2020 before April 1, 2020?
I am glad you posed your question before taking the advice of the custodian! QCDs can NOT be completed until the account owner actually reaches age 70 ½. They are not treated like RMDs (where a person can take their RMD any time in the year they reach age 70 ½). QCDs and RMDs have distinctly different rules.
As for this specific situation, your client can withdraw dollars from her IRA at any time in 2019 and, based on the first-dollars-out rule, they will count toward her RMD. However, if she wishes to complete a $3,000 QCD to offset some of her $35,000 2019 RMD, do NOT take more than $32,000 prior to her 70 ½ birthday in October. Otherwise, the offset will be lost. Once a full RMD has been withdrawn, you cannot retroactively deem a portion of it as a QCD.
Once she turns 70 ½, she can request a QCD from the custodian. The custodian will need to issue a check payable to the qualifying charity or transfer the funds directly to the qualifying charity. The $3,000 QCD dollars can NOT be paid directly to your client, and the QCD must be completed before the end of 2019.
There is no special coding for QCDs on Form 1099-R, so maintaining thorough records to substantiate the QCD (like a receipt from the charity) is vitally important. Also, be sure to work with a competent tax preparer to ensure the QCD gets reported properly.
As for any remaining dollars needed to cover her 2019 RMD, since this is her first RMD, those can be delayed until April 1, 2020 at the latest. Be aware that she will also need to take an additional RMD in 2020 for 2020.
On a positive note, since your client will already be 70 ½ as she enters 2020, she can complete additional QCDs at any time during the year.