IRA Distribution Withholding

[Ed Schillmoeller]

An IRA owner takes his RMD in mid-December of each year and
has sufficient withholding taken from the RMD to avoid
having to pay estimated tax for the year. If the owner dies
before taking the RMD for the year, can withholding be taken
from the RMD for the year of death to avoid paying a penalty
for insufficient estimated tax?

Ed Schillmoeller

 

[Barry Picker]

An IRA owner takes his RMD in mid-December of each year and
has sufficient withholding taken from the RMD to avoid
having to pay estimated tax for the year. If the owner dies
before taking the RMD for the year, can withholding be taken
from the RMD for the year of death to avoid paying a penalty
for insufficient estimated tax?

Once the owner dies, the account belongs to the successor in
interest to the account. The decedent cannot take the RMD,
and therefore the question of withholding is moot. Also,
unless the estate is specifically named as the beneficiary
(a BAD move, but done anyway), or there is no named
beneficiary (also a BAD move), the estate does NOT take the
RMD.

Barry Picker, CPA/PFS, CFP

 

[Brew1]

unless the estate is specifically named as the beneficiary
(a BAD move, but done anyway), or there is no named
beneficiary (also a BAD move), the estate does NOT take the
RMD.

Why would not naming a beneficiary be a bad move, if the
estate were not subject to tax? It seems to me that given
an estate worth less than $1.5M, that unless the beneficiary
is a spouse, there is no advantage.

 

[Barry Picker]

Why would not naming a beneficiary be a bad move, if the
estate were not subject to tax? It seems to me that given
an estate worth less than $1.5M, that unless the beneficiary
is a spouse, there is no advantage.

There is a lot more to IRA distribution planning than estate
tax. There is a big difference between having a named
beneficiary and no having a named beneficiary. If you're
"in the business", I strongly suggest you get up to speed on
this subject.

Barry Picker, CPA/PFS, CFP

 

[Stuart O. Bronstein]

There is a lot more to IRA distribution planning than estate
tax. There is a big difference between having a named
beneficiary and no having a named beneficiary. If you're
"in the business", I strongly suggest you get up to speed on
this subject.

Makes sense. On the other hand there are some situations
that can be fairly complex. For example when there is a
second marriage and children from the first, exactly what
goes to whom when might be a bit convoluted and too much for
a simple beneficiary designation to handle. That's why I
sometimes recommend to people that the trust be the named
beneficiary of their trust.

Stu

 

[Ed Zollars, CPA]

There is a lot more to IRA distribution planning than estate
tax. There is a big difference between having a named
beneficiary and no having a named beneficiary. If you're
"in the business", I strongly suggest you get up to speed on
this subject.

I agree that's true, assuming the beneficiaries want to
stretch out the distribution. Now, quite often that won't
be the case, but if you don't name a beneficiary and under
the terms of the custodial agreement, it then goes to the
estate, you've dramatically limited their choice.

So, yes, normally it would be useful to name a beneficiary
instead of letting it "drop through" to the estate to at
least leave open the possibility of stretching out the
distributions.

Or, at least, the client should understand the consequences
of letting it flow into the estate. That is, I could
understand a client who decides that he/she just wants one
document (the will) to control everything and specifically
doesn't care about the income tax planning options for the
heir--but I'd certainly want to document this was the
client's informed choice to prevent heirs from raising a
fuss about my advice after the client's death.