What to Do When You Miss an IRA Required Minimum Distribution

The U.S. tax code is thousands of pages long. On the plus side, most of those pages won't apply to you or your individual tax-paying situation. On the minus side, even the parts that do apply are extensive, and wading through them can often leave a non-expert with more questions. Well, hosts Robert Brokamp and Alison Southwick named their podcast Motley Fool Answers for a reason, and the Oct. 29 episode -- the monthly mailbag show -- the co hosts have called in reinforcements to provide those tax answers: Motley Fool Wealth Management Director of Financial Planning Megan Brinsfield, CPA, CFP, and all-around fine human being.

In this segment, they pull a letter from a man trying to deal with two different IRA issues, one from each of his parents. Dad turned 70 1/2 last year and has missed the deadline for his first required minimum distribution. Mom, meanwhile, died in 2017, and her children aren't quite sure what that means for her IRA. Megan has some suggestions for what they should do now.

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This video was recorded on Oct. 29, 2019.

Alison Southwick: Our first question comes from Jared. "My family is having difficulty with IRA RMDs." When you say it like that, it makes them sound like weapons.

"And any insight on the following -- IRA required minimum distributions -- would be greatly appreciated. My dad turned 70 1/2 in December 2018 but still hasn't taken the RMD I recently learned was required. Is there any way to avoid the stiff 50% penalty? Additionally, my mom passed away in 2017 before she reached 70 1/2, so no RMDs were required. Can we continue to defer RMDs based on her age and can my sibling and I transfer my mom's IRA that she left to us into our own IRAs?"

Megan Brinsfield: So Jared has a complicated web of things to unwind...

Robert Brokamp: Yes, absolutely.

Brinsfield: ... and it sounds like he's the primary point of contact for this grouping of IRAs that's built up in his family. For taking that on I commend him. 

Just a recap as to why we have RMDs. The government gives you this tax break while you're contributing to IRAs and your retirement plans over the course of your life. Eventually they're like, "We need to get our money sometimes. Like, pay up, guys." They require that you start taking money out of these accounts at a certain age. 

It gets really complicated when you have things happen like someone died before they started taking required minimum distributions -- or someone died after -- and who the beneficiaries are matters. 

One of the things in Jared's questions that isn't clear from the recap but I think is obvious in most cases is that a lot of times spouses leave their IRAs to one another and they might also set aside a separate account for the kids, and when it comes to required minimum distribution, who the beneficiary is matters when that's an inherited account. We'll get to that in a second.

For his dad who's still living -- he just hit 70 1/2 in December and missed that first RMD that he was supposed to take in 2018 -- the question is, "Oh, gosh, what do we do about that? Can we go back? Can we fix it?" The good news is that the first RMD you can take the year after you turn 70 1/2, but it's still supposed to be done by April 1st of the following year. At least that gets you into 2019 and it makes it a lot easier to clean up messes that are happening in the same calendar year for tax purposes. 

There is kind of a mea culpa procedure on the required minimum distributions where it says, "We made a mistake, but we had a reasonable cause and we're correcting it quickly. We've taken swift action on this and it won't happen again. We promise." That's essentially what the instructions for the tax form say. So Form 5329 is where you pay penalties for all sorts of mistakes that you could make. 

The last one on the list is missing an RMD. You say, "I missed it, but I have this waiver," and you attach a statement that says why you missed it. Things like, "I was really ill and I couldn't take it," or one that we love seeing is, "My financial advisor didn't tell me to." That's not technically a good excuse, but it is one that people use a lot of times. Or, "The notification was sent to the wrong address." Technical errors and stuff like that. 

I think for his dad he can get things back on track in 2019 by taking last year's required minimum that was supposed to happen, as well as this year's and say, "Hey, IRS, we're on track, now." That's kind of nice because there are a lot of places that the IRS isn't quite as forgiving.

Southwick: And what about with his mom's IRA?

Brinsfield: So his mom's IRA -- the part that goes to his dad. I'm assuming that there's one IRA that went to his dad as a surviving spouse and then another IRA that went to the kids. That's important because as a spouse, to get these special benefits as a beneficiary, you have to be the only one inheriting it. So what's cool is that IRS allows people to treat an inherited IRA from a spouse as their own, which is really good if they are inheriting from someone who's older. They can roll it into their own account and take distributions over a longer time frame. 

But if someone is younger, like in this case -- I'm assuming his mom is a bit younger than his dad -- his dad could actually say, "I'm going to leave it in this inherited structure," because in that structure he doesn't have to take a distribution until his mom would have been 70 1/2, so he can leave it there and let it grow until she would have been 69 1/2. Then he can move it into his own name and take distributions in his own name. 

And you're looking at me like, "Why would you want to do that? That's like a lot of hassle and calendar reminders." But the reality is inherited IRAs use a different life expectancy table for distributions than your own IRAs and it's better, or more advantageous, to be using the table for your own IRA. I just looked at one random line on those different tables and it could mean a difference of over 2% distributions each year and that adds up quite quickly. 

I think the last question was whether the kids can take this inherited IRA and put it into their own and the answer is no, because that is a special rule that only exists for surviving spouses. 

Brokamp: So even though they're not 70 1/2, when you inherit an IRA from someone other than your spouse, you have to start taking required minimum distributions.

Brinsfield: Exactly. And if you don't get on that plan right away, you have five years to liquidate the whole account, which is pretty severe.