If the IRA owner died before their RBD, there is no year of death RMD that you need to take. However, if the IRA owner died after their RBD, there may be an RMD that you as their beneficiary have to take that year.
When a loved one is no longer with us, do all of their financial and legal affairs cease? For the most part – yes. But when the loved one is over the age of 70 ½, there could be an exception in the form of their final RMD on their IRA.
Many surviving designated beneficiaries of a decedent’s IRA do not realize that Required Minimum Distributions (RMDs) have to be taken annually and up to the end, even if the owner died earlier in that year. In fact, the year of death IRA distribution is a requirement that is easy to miss.
Recently, The Slott Report took up this matter in an article titled “Taking the Year of Death IRA Minimum Distribution.”
Essentially, the RMD is required because there is an attending tax burden involved. As you likely are aware, any individual over the age of 70 ½ must take RMD from their IRA. When it comes to the year of death for such an individual, their designated beneficiary of the IRA beneficiary must take the RMD even before inheriting the IRA itself.
OK; simple enough. The trouble is that it is difficult to track whether the decedent had already taken their full RMD in the year of their death. For example, were they on a monthly installment plan? Were they waiting until the last moment? Did they miscalculate?
So, what is the penalty for failing to take the full RMD? Would you believe a whopping 50% of the shortfall?!
If you are the IRA owner, then you can see how accurate and communicated recordkeeping can help your loved ones (i.e., your designated beneficiaries) avoid an unpleasant treasure hunt to determine the post-mortem status of your RMD.
Reference: The Slott Report (April 30, 2013) “Taking the Year of Death IRA Minimum Distribution”