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IRS gives ‘second chance’ to IRA nonspouse beneficiary

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in Small Business Tax

A new IRS private ruling could bode well for nonspouse IRA beneficiaries. (IRS PLR 200811028) The IRS allowed a nonspouse IRA beneficiary to preserve tax deferral after failing to take the required minimum distributions (RMDs) for two years.

Advisory: The taxpayer still had to pay a stiff penalty for the initial failure to take the RMDs.

The normal “required beginning date” for IRA RMDs is April 1 of the year after the year in which the owner turns age 70 1/2. But if an IRA owner dies before the required beginning date, the entire interest must be distributed to a nonspouse beneficiary within five years of death unless the IRA trust document permits the RMDs over the nonspouse beneficiary’s life expectancy. Under the life expectancy method, the initial RMD must be taken by Dec. 31 of the year after the year of the IRA owner’s death.

Facts of the ruling:  An unmarried taxpayer was age 66 when he died in 2002. He had named his 30-year-old daughter as the beneficiary of two IRAs. After his death, the IRAs were retitled under the decedent’s name with the daughter as the beneficiary.

However, she did not take any RMDs for 2003 and 2004. In 2005, she received RMDs equal to the total required for 2003, 2004 and 2005 based on the life expectancy method. The daughter then paid a penalty tax for failing to take the RMDs in 2003 and 2004.

Favorable result: The IRS ruled that the nonspouse beneficiary's failure to take the RMDs in 2003 and 2004 did not preclude her from using the life expectancy method for the RMDs for 2005 and beyond. Therefore, she can continue to spread payments over her life expectancy.

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