Yes, advisers all know that required minimum distributions, or RMDs, generally had to be done by the end of last year. Hopefully the ones that you know about were done.
But these are some RMDs that often fall through the cracks:
Death gets you out of pretty much everything in the tax code, except RMDs. If your client died in 2018 and was subject to RMDs, was the year-of-death RMD taken? If not, it is still subject to the 50% penalty, the same as for any RMD that was not taken. (There is no death exception for the penalty.)
The beneficiary must take any part of the year-of-death RMD that was not taken last year, and that beneficiary will also report the income. Once the IRA owner dies, the account belongs to the beneficiary.
There is confusion on this since some estate attorneys and CPAs think the year-of-death RMD belongs to the deceased IRA owner, or his estate. But that is not the case.
The beneficiary should immediately withdraw the amount that the deceased IRA owner would have had to take had he or she lived. For the missed year-of-death RMD, it is the beneficiary who is subject to the 50% penalty.
The beneficiary will likely also have to withdraw the first-year RMD as a beneficiary. Assuming the beneficiary was a designated beneficiary, meaning named on the IRA beneficiary form, then the first-year RMD (for this year — 2019) will be based on the age of the beneficiary from the IRS Single Life Table. The beneficiary then will have to withdraw the total of both RMDs in 2019, if the year-of-death RMD (or any part of it) was not taken in 2018.
The best way to do this is to take two separate distributions: one for the make-up year-of-death RMD and a separate one for the beneficiary's RMD. This is not required, but as a practical matter, it's best to be able to show two separate distributions to avoid trying to figure out how much of the total was the missed year-of-death RMD if you're questioned in a later year by IRS.
The beneficiary would then have to file IRS Form 5329 — Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts — with the beneficiary's personal tax return to request that the IRS waive the 50% penalty for the missed year-of-death RMD. You have to ask. The IRS will not waive the penalty without the formal request on Form 5329.
The penalty does not have to be paid with the form, but you do need to attach a short statement saying that you took the missed RMD immediately upon discovery of the oversight and citing your reason for not taking the RMD. In this case, the death of the IRA owner is an acceptable reason and IRS should waive the penalty.
It is critical that this form is filed, because it is treated as a separate tax return and the statute of limitations won't begin to run on the open 50% penalty until the form is filed. This could leave that penalty alive and growing as it accrues interest and other potential penalties.
File the form for the year of the missed RMD, in this case 2018. If there are other back-year missed RMDs, either the client's own or inherited RMDs, then Form 5329 has to be filed for all of those back years requesting the waiver.
(More: 4 ways to reduce RMD taxes)
Inherited Roth IRAs
These are sometimes missed because there are no RMDs for Roth IRA owners, but once the Roth IRA owner dies, any non-spouse beneficiary is subject to RMDs on the inherited Roth IRA, even though those RMDs will most likely be tax-free. They still must be taken.
Can you imagine a client getting hit with a 50% penalty on a withdrawal that would have been tax-free? That's not good. If these RMDs are missed, follow the Form 5329 procedures outlined above.