Little-known RMD issues do pop up every once and awhile.
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Two recent questions involved little-known aspects of the required minimum distribution rules: The RMD may not exceed the value of the account on date of distribution; IRAs are not aggregated for purposes of computing the RMD; and an RMD missed in one year is carried over and added to the RMD for the next year.
Question: My client turns age 73 in 2010. He has twos IRAs. IRA #1 holds only one asset, an office building (no mortgage). The appraised value of the building on Dec. 31, 2009, was $400,000, so his RMD for 2010 for IRA 1 is $16,194.33 ($400,000 prior year-end value, divided by 24.7, which is the factor from the Uniform Lifetime Table for an individual age 73). IRA 2 held, on Dec. 31, 2009, $1 million of mutual funds and cash, so the 2010 RMD from IRA 2 is $40,485.83.
In January 2010, the building owned by IRA 1 was destroyed by a mudslide. There was no insurance coverage. The building is now worth only $1,000 (salvage value of the building lot, minus cleanup costs). How can my client comply with the requirement of taking out $16,194.33 from IRA 1 when the entire account is worth only $1,000? Does he have to take the other $15,194.33 out of IRA 2?
Natalie: I have good news for your client (sort of): The RMD can never exceed the total value of the account at the time of the distribution. So the RMD for IRA 1 for 2010, if he closes IRA 1 and distributes the building to himself right now, is only $1,000.
He does not have to aggregate his two IRAs for purposes of computing the RMD from either account. The RMD is computed separately for each IRA. He has the option of taking the RMD for each of the IRAs from either account, but he should not use this "optional" aggregation this year because he wants to limit the RMD for IRA 1 to the value of the account on the date of distribution. I think that means he has to actually close out IRA 1 and take distribution of the building right now while the value is only $1,000. Then he can take the $40,485.83 RMD from IRA 2 in normal fashion anytime in 2010. The missing $15,194.33 of RMD from IRA 1 disappeared in the mudslide.
Question: "Delilah" inherited a $1 million IRA from her father, who died in December 2009 at age 89. Father's RMD for 2008 for that IRA was $70,000, but because of his failing health, he did not take any IRA distributions in 2008. Father left the rest of his estate to his son, "Samson," and named Samson as executor. Samson is now cleaning up Father's financial affairs, including requesting an IRS waiver of the 50 percent penalty on the missed 2008 RMD. In order to get a waiver, the executor has to show the IRS good cause for the missed distribution (that's taken care of; medical evidence shows Father was physically and mentally incapable of handling finances in 2008), and also has to show that a distribution has been taken from the IRA to "remedy the shortfall." He has asked Delilah to take out $70,000 from the IRA, now, to show the IRS the shortfall has been remedied. But Delilah hates Samson and has told him to take a hike, she doesn't care if the estate is stuck with a penalty due to Father's failure to take his 2008 RMD. What can Samson do, if anything?
Natalie: Delilah is under the sadly mistaken impression that she has no responsibility for this missed RMD. She is quite wrong. The regulations provide that, if an RMD is missed for a particular year, it is added to and becomes a part of the RMD for the next year (and on and on every year until it is actually distributed). So the missed RMD for 2008 carried over to 2009.