Last year (Feb. 2018) I researched required minimum distributions heavily when helping my mom determine hers for the first time. It was then I learned about times you could be affected by RMDs well before you turn 70 yourself. I then wrote about it to help others who may inherit retirement accounts.
During that process, a big red flag went up for me.
The rest of the story and how we fixed it follows. Starting with a bit of background information to help paint the picture of why you should not make major financial decisions or transactions at times of stress.
A Year+ of Love and Loss
Much of 2013 and 2014 were roller-coaster years for my husband and I. We got married, moved twice, changed jobs, and each lost a parent. John’s mom passed in October 2013 and my father just six months later in April 2014.
From the time of my mother-in-law’s passing to my father’s, my dad was in and out of the hospital multiple times. With us living an hour away from my dad and our workplace (both in different cities also an hour apart) we spent many hours in the car between them all. To say we were experiencing some resulting stress is an understatement.
Plus a Lack of Understanding
You don’t know, what you don’t know.
I was a newbie reader of personal finance blogs in 2013. While I’d learned quite a few things I had no experience with inheritances of any kind let alone inherited IRAs.
So when John inherited a small IRA from his mom, we looked to his family and the financial institution where the IRA was held to help direct us on our options.
At the time, neither of us had the mental bandwidth to tackle any research on our own. And we failed to ask questions or dig into what John ultimately signed up for.
Equals a Big Mistake
John’s non-spousal inherited IRA funds should have been rolled into a new account properly titled as an “Inherited IRA” or “Beneficiary IRA”. We now know the
An adequately titled inherited or beneficiary IRA retains the name of the deceased as well as the name of the new IRA owner as the beneficiary.
If you inherit a traditional IRA from anyone other than your spouse, you can’t treat it as your own. Instead, you need to have the account re-titled. According to IRS Notice 2007-7, the IRA must be “established in a manner that identifies it as an IRA with respect to a deceased individual and also identifies the deceased individual and the beneficiary, for example, ‘Tom Smith as
In John’s case, retitling the existing IRA wasn’t possible because his brother was also receiving some of the funds. So John’s portion went into a new fund.
As a result of all the above, we did not realize John needed to take RMDs – which should have started in 2014, based on his mom’s age.
Because the IRA funds were in John’s name alone and did not include his mom as the original owner, the bank did not send notifications of required distributions since John is well under the age of 70 1/2.
And we were none the wiser until I researched RMDs for my mom and read about inherited IRAs.
Correcting the Error and Missed RMDs
After spending countless hours online researching and communicating with the bank holding the IRA, they admitted they improperly titled the IRA and sufficiently corrected it.
We then set out to take all the missed required minimum distributions and file all the paperwork in hopes of avoiding severe penalties – up to 50% of the missed RMD amount.
Following researched information and this
As advised in the linked article above he took the total distribution in five separate checks, one for each year ’14 – ’18, so we could make a copy of each individual check to send to the IRS with Form 5329 proving he remedied the missed RMDs for the four years.
We don’t know yet if he’ll be paying penalties or not for the missed distributions.
Avoid Our Mistakes
It’s highly probable you may inherit a retirement account from a parent, spouse, other relative, or friend in your lifetime. And you certainly may pass on one to a beneficiary.
Ensure you and they understand the available options and how to handle the funds when the time comes.
Don’t make major financial decisions when you’re under extreme stress. Or when you don’t understand all the rules or implications of your actions.
Don’t assume those you deal with at a financial institution understands all the rules pertaining to your situation. It’s really your responsibility, so do your homework and contact professionals as necessary.
You don’t know, what you don’t know.
Nor do you know what others don’t know.
That’s why I believe in continual learning and sharing lessons learned with others. I hope our story helps prevent someone else from making a similar mistake and missing the RMDs.
If you did miss taking RMDs don’t panic, you can remedy the mistake. Just know you might face a penalty if you’re found at fault. T