Advanced Underwriting Consultants

Question of the Day – September 30

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: What’s the deadline for my client, who has inherited an IRA from a nonspouse, to elect to stretch out payments from the IRA based on the client’s life expectancy?

Answer: Under Treasury Regulations 1.401(a)(9)-3, a nonspouse beneficiary choosing to take payments based on the life expectancy method must begin payments by the end of the calendar year following the taxpayer’s death.

For nonspouse beneficiaries who inherit an IRA from a decedent who had not yet begun RMDs, the choice is usually between the stretch based on life expectancy, and complete distribution within five years.  Where the beneficiary does not choose the life expectancy method, complete distribution within five years is usually chosen.

The IRS, in Private Letter Ruling 200811028, said that even when a nonspouse beneficiary failed to elect stretch for several years after the taxpayer’s death, the beneficiary could still make a late stretch election.  The beneficiary would have to pay the 50% penalty tax for failure to take the prior RMDs due for the year after the taxpayer’s death and any following years.

Why would the beneficiary voluntarily pay such a hefty tax penalty?  In some cases, the value of preserving the option to pay out the IRA over the beneficiary’s life expectancy—and deferring taxes on those required payments—would more than offset the penalty tax on the undistributed RMDs.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.