1

What's the best recovery from the following situation:

  • An over 70 1/2 year old person died January 10th.
  • A required minimum distribution for that person's traditional IRA was incorrectly taken out by automatic process, after date of death.

In this case the beneficiary's tax bracket is higher than the parents.

3

You need to be more specific than just an "over 70.5 year old person" and tell us how much over 70.5 this person was, because the rules are slightly different for those who turned 70.5 during 2016 and those who turned 70.5 before 2016. For the latter, the required starting date for RMDs (April 1 of the year following the year in which the person turned 70.5) was April 1, 2016 or earlier. In this case, the RMD for 2017 is supposed to be taken by the estate, and not by the beneficiary. If the 2017 RMD was set up to be taken automatically, it most likely was distributed to the person's bank account (now part of the person's estate even if the bank has not been notified as yet of the death of the account holder) and not to the IRA beneficiary. If the IRA beneficiary was also the testamentary beneficiary of the deceased person, the estate is small and did not require going through probate, and the IRA beneficiary has already received all of the money in that bank account, then that money is part of an inheritance and is not taxable income to the IRA beneficiary. However, the executor of the estate must file a final income tax return for the person and estate, and pay taxes due on that RMD, but at the rates for that tax return and not the beneficiary's tax return. If all the assets of the estate have been distributed to the various beneficiaries already, then there is no money in the estate to pay that final tax bill, and the executor can demand the return of some of that inheritance amount to pay that tax bill. Of course, if the executor is the same as the IRA beneficiary, the IRA beneficiary simply attaches a personal check to that final tax return to pay the tax man.

The rules are different (and much more complicated) if the person turned 70.5 during 2016 and chosen to postpone taking his RMD for 2016 (with the plan being to take the 2016 RMD by April 1 2017, except that death intervened before the 2016 RMD could be taken). See IRS Publication 590b for details.

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