Our friends at DP Legal Solutions discuss how one of the most common—and stressful—questions we hear after a client passes away is: “What happens to the Required Minimum Distribution (RMD) this year?” If the deceased owner hadn’t finished taking their distribution, the clock is ticking for the heirs. An estate administration lawyer can help you navigate these time sensitive requirements, stay compliant, and avoid unnecessary penalties. Contact an experienced lawyer today to ensure you stay compliant and avoid unnecessary penalties.
The Rule for the Final Year
If an IRA owner was already of age to take RMDs (currently age 73) and they pass away before taking their full distribution for that year, the law is clear: the remaining balance must be distributed to the beneficiaries by December 31st of that same year.
The money is taxed to the beneficiary who receives it, as it is considered “Income in Respect of a Decedent” (IRD). It does not get a “stepped-up basis” like a house or a stock account would.
The Cost of a Mistake
The penalty for failing to take an RMD used to be a staggering 50%. While it has been lowered, it is still a significant 25% of the amount that should have been withdrawn. For example, if a $40,000 RMD was missed, the penalty could be $10,000.
- Voluntary Compliance: If you realize the mistake and fix it quickly, the penalty can sometimes be reduced to 10%.
- The Grace Period: Recent regulations provide a small amount of relief. If the RMD wasn’t taken in the year of death, the beneficiary can often receive it in the following year and avoid the penalty.
Why You Need Professional Guidance
Managing the final affairs of a loved one involves a lot of moving parts. It’s easy to overlook a mid-year RMD while dealing with probate, funeral arrangements, and other assets. We help you create a checklist for the transition to ensure no deadline is missed and no penalty is triggered.
Navigating tax law during a time of loss is a heavy burden. Let us help you carry it. For professional support and peace of mind, contact an experienced lawyer today.