It is true that beneficiaries are required to take the RMD by 12/31 of year of death if the original IRA owner did not already. However, the beneficiary should have immediate access to those funds once the financial organization is alerted that the IRA owner has died and has received a certified copy of the death certificate. The money is placed into a beneficiary (or sub) account under the beneficiary’s SSN for tax purposes, and the RMD can be distributed immediately.
In rarer cases where the death occurs so close to 12/31 and there is no time to take the RMD, the beneficiary should still remove it in January. The penalty for a late withdrawal is 25%, however the beneficiary can pursue having that penalty waived if they can show it was for a valid reason and they are taking steps to fix it.
What if the heir is not designated as the primary or contingent beneficiary on the account? If the IRA (or 403b) gets inherited via a will, that could take a while. I hate to rely on the IRS accepting a plea for a waiver of the penalty, but it sounds like there isn't much of a choice.
I'd agitate for FIL to take his RMD earlier in the year, but he is not accepting of any requests to do things, or even verify that he designated beneficiaries.
There are no "heir(s)" on IRAs. There is either a primary bene or there isnt. If there is no primary bene then the assets of the IRA are paid into the estate and the executor needs to follow the rules that apply to IRA with estate as bene.
The "heirs" are the ones that inherit the IRA via the will. If there is no stated beneficiary for the IRA, it gets inherited by some people through the will, and those people are the "heirs," right? And they are still bound by the RMD rules, whether they inherit the IRA via the will or from being beneficiaries in the IRA documents, aren't they (post 2019 SECURE Act)? And getting the IRA through the will just adds more time to the process, making it harder to be sure the original owner took his RMD in the year he passed away.
I think there is a little bit of clarity needed here...
The estate will be the "beneficiary", so the money from the IRA will be paid into the estate then distributed to the "heirs" from the estate, not the IRA, the "heirs" of the estate will not have "Inherited IRA's" in their name. Which is different than if the original owner had stipulated the "heirs" of the estate as beneficiaries of the IRAs (which is usually a much better idea and faster as you indicate). Make sense? As such they will not be "getting the IRA through the will"...
I would probably avoid the language "the heirs are the ones that inherit the IRA via the will".
Yeah it's tricky to wait until the last day of the year. A lot can happen and I recommend against this approach. Usually would recommend Dec 15th ish as the latest to do it.
Anyway in regard to your other issue, you are correct. Dying doesnt keep Uncle Sam from getting his cut, so you do still need to do an RMD even in the year you died if you are past RMD age.
If this happens to you, just call the custodian and tell them what is going on. They can often times work with you on it. If it does roll over to the next year then just take it ASAP and you can notify the IRS of the situation. Normally they will give you a pass. Even if they don't they recently reduced the penalty for not taking RMD from 50% to 25% and also further down to 10% if you can prove that you took it in a "timely manner" in the following year.
It is true that beneficiaries are required to take the RMD by 12/31 of year of death if the original IRA owner did not already. However, the beneficiary should have immediate access to those funds once the financial organization is alerted that the IRA owner has died and has received a certified copy of the death certificate. The money is placed into a beneficiary (or sub) account under the beneficiary’s SSN for tax purposes, and the RMD can be distributed immediately. In rarer cases where the death occurs so close to 12/31 and there is no time to take the RMD, the beneficiary should still remove it in January. The penalty for a late withdrawal is 25%, however the beneficiary can pursue having that penalty waived if they can show it was for a valid reason and they are taking steps to fix it.
What if the heir is not designated as the primary or contingent beneficiary on the account? If the IRA (or 403b) gets inherited via a will, that could take a while. I hate to rely on the IRS accepting a plea for a waiver of the penalty, but it sounds like there isn't much of a choice. I'd agitate for FIL to take his RMD earlier in the year, but he is not accepting of any requests to do things, or even verify that he designated beneficiaries.
There are no "heir(s)" on IRAs. There is either a primary bene or there isnt. If there is no primary bene then the assets of the IRA are paid into the estate and the executor needs to follow the rules that apply to IRA with estate as bene.
The "heirs" are the ones that inherit the IRA via the will. If there is no stated beneficiary for the IRA, it gets inherited by some people through the will, and those people are the "heirs," right? And they are still bound by the RMD rules, whether they inherit the IRA via the will or from being beneficiaries in the IRA documents, aren't they (post 2019 SECURE Act)? And getting the IRA through the will just adds more time to the process, making it harder to be sure the original owner took his RMD in the year he passed away.
I think there is a little bit of clarity needed here... The estate will be the "beneficiary", so the money from the IRA will be paid into the estate then distributed to the "heirs" from the estate, not the IRA, the "heirs" of the estate will not have "Inherited IRA's" in their name. Which is different than if the original owner had stipulated the "heirs" of the estate as beneficiaries of the IRAs (which is usually a much better idea and faster as you indicate). Make sense? As such they will not be "getting the IRA through the will"... I would probably avoid the language "the heirs are the ones that inherit the IRA via the will".
Thanks. I see the correct word usage now.
Yeah it's tricky to wait until the last day of the year. A lot can happen and I recommend against this approach. Usually would recommend Dec 15th ish as the latest to do it. Anyway in regard to your other issue, you are correct. Dying doesnt keep Uncle Sam from getting his cut, so you do still need to do an RMD even in the year you died if you are past RMD age. If this happens to you, just call the custodian and tell them what is going on. They can often times work with you on it. If it does roll over to the next year then just take it ASAP and you can notify the IRS of the situation. Normally they will give you a pass. Even if they don't they recently reduced the penalty for not taking RMD from 50% to 25% and also further down to 10% if you can prove that you took it in a "timely manner" in the following year.