Understanding Distribution Rules from an Inherited IRA
When it comes to managing an inherited IRA, one of the most critical points to understand is the rules around taking distributions. This includes the timing of distributions, penalties for failure to take distributions, and when the owner of the IRA received their required minimum distributions (RMDs). Understanding these rules is essential for keeping your inherited IRA in compliance with IRS regulations.
The Scenario: An Inherited IRA from Mom
Your situation, inherited from your mother, is a common example of the challenges that can arise when managing an inherited IRA. Your mother passed away at the end of 2018, and no distribution was taken by the time the inheritance was finalized in 2019. You were told that you must take a distribution and pay a penalty, unless you could apply for a hardship exemption.
Required Minimum Distributions (RMDs) After Inheritance
Title 26 of the United States Code, specifically Section 401(a)(9), governs the rules for RMDs from an inherited IRA. According to these regulations, if the original owner of the IRA was not your spouse, you have several options based on the circumstances of the inheritance and the age of the original owner when they passed away.
When You Are Not the Spouse
If the original IRA owner was not your spouse, the distribution rules are different. In such a case, you are required to take the entire distribution of the inherited IRA by the required calendar year. If the owner passed away before the year they were required to begin taking RMDs, the distribution must be completed within 10 years after the year of the owner's death. However, if the owner passed away on or after the required beginning date (age 72 for those born after June 30, 1949), you have the option to spread the distributions over your remaining life expectancy.
When You Are the Spouse
If the original IRA owner was your spouse, the scenario is more favorable. You have two options:
Rollover the IRA to Your Own Account: If you elect to roll the IRA over into your own IRA, it will continue to earn growth tax-deferred, provided you are the only beneficiary. You can manage it as if it were your own IRA, including the ability to not start required distributions until age 72. Taking Required Withdrawals: If you do not elect to roll-over, you are required to take the entire distribution within 5 years of the owner's death unless you are younger than the deceased owner.Penalties for Non-Compliance
Failing to take the required minimum distribution (RMD) can result in a significant tax penalty. The IRS imposes a 50% penalty on the amount of the required minimum distribution that was not withdrawn as required. For example, if you are required to take a $10,000 distribution and do not, you will owe a penalty of $5,000 in addition to the taxes due on the $10,000 distribution.
Hardship Exemptions
In some cases, you may be able to apply for a hardship exemption. Hardship exemptions typically involve situations where you need to use the IRA funds to resolve an immediate and substantial financial need. If you can prove that you have exhausted all other options and the distributions are necessary for your current financial situation, you may be granted a partial or full exemption from the distribution requirements. However, obtaining a hardship exemption is not always an easy route, and you should consult a financial advisor or a tax professional for guidance.
Consulting IRS Publication 590
The IRS provides detailed information on these rules in Publication 590. This comprehensive guide covers all aspects of RMDs, including specific instructions and examples. It is a valuable resource for both individuals and advisors who need to navigate the complexities of inherited IRAs.
Conclusion
Successfully managing the intricacies of an inherited IRA requires a thorough understanding of the rules governing required minimum distributions (RMDs). Whether you are the spouse of the original owner or a non-spouse beneficiary, the appropriate strategy depends on your specific circumstances. Adhering to these rules is crucial to avoid heavy penalties and to ensure that the IRA continues to serve its intended purpose for the benefit of your family's financial security.