100% required minimum distributions

In some cases, the RMD is the entire IRA balance — or more!

Mar 6, 2019 @ 5:02 pm

By Ed Slott

Can it ever be the case that an individual retirement account's required minimum distribution, or RMD, for a year equals the entire IRA balance? Yes, but that only happens if there is no designated beneficiary.

A designated beneficiary means an individual beneficiary named on the IRA beneficiary form. Often there is no designated beneficiary, either because no beneficiary was named on the beneficiary form or the named beneficiary is not an individual but instead is an estate, charity or non-qualifying trust.

Even if the IRA eventually goes to an individual beneficiary, if it gets to that beneficiary through the estate for example, then there is no designated beneficiary.

The 100% RMD occurs when there is no designated beneficiary and the IRA owner died before his or her required beginning date (April 1 of the year following the year the IRA owner reaches age 70½).

In that case, the entire inherited IRA must be paid out under the so-called "five-year rule," which says an IRA must be withdrawn in full by the end of the fifth year after the year of the owner's death. Unlike a stretch IRA, where withdrawals are taken ratably over many years, under the five-year rule no distributions are required during the first through fourth years after the owner's death. But whatever is left in the inherited IRA in the fifth year must all be withdrawn in that year. In this case, the fifth year RMD is 100% of the account balance, and that RMD will be taxable all in one year (unless this is an inherited Roth IRA).

(More: 5 costly inherited IRA mistakes)


Josie never named a beneficiary on her IRA, so when she died in 2013 at age 65, her estate became her beneficiary by default.

Because the estate was the beneficiary and Josie died before her required beginning date, the five-year rule applied. This means that Josie's entire IRA had to be emptied by Dec. 31, 2018.

Josie's will named her two sons, Len and Ben, as co-executors of her estate. Len and Ben never got along and they fight about everything. As a result, in 2019, Josie's IRA is still sitting there. The estate will owe the 50% penalty for 2018 on the total balance of Josie's IRA for 2018 because that was the year the RMD was 100% of the IRA. If Len and Ben do not take a total distribution in 2019, the 50% penalty will apply for that year too and for every year the RMD — the total amount in the IRA — remains undistributed.

If the beneficiary neglects the 100% RMD for even a few years, the 50% penalty can actually exceed the amount of the total IRA balance, leaving the beneficiary with a growing tax debt instead of an expected inheritance, especially when you add in the mounting penalties and interest. Advisers need to react quickly to recognize the problem and to have these RMD penalties waived.

To have the penalty waived, the beneficiary must take the missed RMD and then file Form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts) to request a penalty waiver. The form must be filed for each year there was a missed RMD. There is no statute of limitations if this form is not filed, so the 50% penalty will never go away unless the waiver is requested.

(More: A younger spouse can lower required minimum distributions)

Roth IRA Trap

This 100% RMD situation hits inherited Roth IRAs harder. When there is no designated beneficiary on a Roth IRA, the inherited Roth funds will always be subject to the five-year rule, no matter when the Roth IRA owner died.

Roth IRA owners are not subject to RMDs during their lifetime so there is no required beginning date for a Roth owner. This means that whenever a Roth IRA owner dies without a designated beneficiary, that inherited Roth will be subject to the five-year rule. That can put a real damper on the tax-free growth for the beneficiary.

The 100% RMD will be tough for an adviser to explain to a beneficiary when this outcome could be avoided just by checking IRA beneficiary forms to make sure intended beneficiaries are named.

(More: Were any required minimum distributions missed last year?)

For more information on Ed Slott, Ed Slott's 2-Day IRA Workshop and Ed Slott's Elite IRA Advisor Group, please visit www.IRAhelp.com.


What do you think?

View comments

Upcoming event

Nov 13


Top Advisory Firm Summit

Formerly known as the Best Practices Workshop, this new one-day conference will also include content from the Best Places to Work event!The Top Advisory Firm Summit will provide CEOs, COOs, CTOs, CMOs, and Managing Partners from the... Learn more

Most watched


Finding your edge from Tony Robbins

Guru Tony Robbins has helped a lot of people, but armed with his psychology Financial Advisor Josh Nelson has helped his practice soar.


Finding innovation in your firm

Adam Holt of AssetMap explains how advisers understand they need to grow, but great innovation may be lurking right under your nose.

Latest news & opinion

Redtail CRM data breach exposes personal client data

The information exposed includes names, addresses, dates of birth and Social Security numbers.

This strategy can double your estate-tax exemption

'Portability' allows a surviving spouse to tack the decedent's exemption on to his or her own. Despite the higher threshold for paying estate taxes in the 2017 tax law, experts recommend filing for the benefit.

Couple in Morgan Stanley advisory account wins $519,000 arb case over unsuitable investments

Plaintiff's lawyer says junk bonds, futures contracts and derivatives were inappropriate for his clients.

The growth of factor-based investing

Advisers are making decisions about clients' portfolios by using the same characteristics that govern factor-based ETFs.

Finra makes its list to target hundreds of rogue individuals

The regulator sees patterns in the behavior and disclosures of high-risk brokers.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print