By Andy Ives, CFP®, AIF®
IRA Analyst
A member of Ed Slott’s Elite Advisor Group℠ emailed us recently with a question about a minor child as beneficiary of her father’s IRA. The question was brief, and I think the expectation was that our reply would be of similar length. But our job is not to answer in the fewest words possible. Our responsibility is to fill in the blanks and make sure that member advisors are armed with all the pertinent details. Here is that communication. (Note: Some details have been changed for privacy.)
QUESTION:
Dad died leaving a $200,000 IRA to his daughter. He was not yet taking required minimum distributions (RMDs). Dad died in 2023. Daughter turned age 15 that year. When does her 10-year window begin?
OUR RESPONSE:
Here are the details in bullet points to keep it all straight:
- Dad died in 2023 prior to his required beginning date (RBD), so no lifetime required RMDs for Dad.
- Daughter is an eligible designated beneficiary (EDB) because she is a minor child of the IRA owner.
- As an EDB, and with death prior to the RBD, Daughter has a choice:
- 10-year rule with NO annual RMDs. The 10-year period would start in 2024 and end in 2033 when the entire account would need to be emptied.OR…
- Stretch RMDs starting in 2024 when Daughter was age 16 (at her birthday that year). The single life expectancy for a 16-year-old is 69.0. That would be Daughter’s starting factor in 2024, and she would subtract 1.0 from that number each year (i.e., 68.0 in 2025, 67.0 in 2026). Daughter would take RMDs each year until and including the year she turns age 21 (2029). At that point, the 10-year period kicks in (the year she reaches age 22). Daughter continues with the same RMD factor she was using, minus 1.0, for years 1–9. The account must be emptied by the end of the year (2039) in which Daughter turns age 31.
- If Daughter has not taken any RMDs in 2024 or 2025, and if she wants to leverage the EDB stretch + 10-year rule, then we have missed RMDs for 2024 and 2025. No worries. We follow the missed RMD penalty waiver request process.
- The process is: take the missed RMD, complete Form 5329, send the form and a letter to the IRS explaining what happened, that it has been corrected, and to please waive the missed RMD penalty. The IRS has shown that it is agreeable to work with proactive taxpayers.
- If Daughter wants to stick with just the 10-year rule and no EDB stretch, then no RMDs have been missed, and no penalty waiver request is needed.
- If Daughter goes with this 10-year/no RMD option, I suggest not waiting until the end of year 10 (2033) to deplete the account, because she could face an elevated “balloon” tax bill. A gradual drawdown over the next few years, being mindful of tax brackets, could be wise.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
https://irahelp.com/real-life-scenario-minor-as-edb-beneficiary/