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By Andy Ives, CFP®, AIF®
IRA Analyst

When an IRA owner taking required minimum distributions (RMDs) dies before removing his annual RMD, that year-of-death RMD (or whatever portion remains) must still be withdrawn. Upon passing, the year-of-death RMD immediately becomes the responsibility of the beneficiary. If it is not withdrawn before the end of that same calendar year, it is a missed RMD and potentially subject to a 50% penalty. Even if the IRA owner dies late in the year, December 31 remains the deadline for the beneficiary to take the year-of-death RMD.

If there is more than one beneficiary, the year-of-death RMD may be split in any manner among the beneficiaries. There is no requirement to distribute it equally. As long as the proper amount is paid out in time, the IRS does not care who takes the year-of-death RMD. For example, if one beneficiary chooses a lump sum payout for her portion while the other beneficiaries choose to establish inherited IRAs, that lump sum payout to a single beneficiary could satisfy the entire year-of-death RMD requirement (assuming it was enough to cover the RMD amount).

The year-of-death RMD is not paid to the original owner’s estate unless the estate is the named beneficiary. Occasionally, a person will die right before his RMD was scheduled to be automatically paid out. If the RMD is then erroneously paid to the deceased account owner, the RMD must be returned to the IRA and properly distributed to the beneficiary. The year-of-death RMD can be transferred to an inherited (beneficiary) IRA first and paid later in the year. Some custodians require that the year-of-death RMD be handled in this manner to help clarify the tax reporting for the beneficiary.

What if an IRA owner was planning on using a QCD (qualified charitable distribution) to remove the RMD amount from his income, but died before he requested the QCD? Can the beneficiary request the QCD be completed in the name of the decedent with the year-of-death RMD? No. Again, the year-of-death RMD is the responsibility of the beneficiary and cannot be paid to the decedent’s estate, personal accounts, or handled as a QCD in the name of the decedent.

If the decedent can’t do a QCD, can the beneficiary do a QCD from the new inherited IRA? Can the beneficiary do a QCD to cover the year-of-death RMD in his own name? Yes, but only if the beneficiary is otherwise eligible to do a QCD. Meaning, the beneficiary (as is the case with all people when it comes to QCDs) must be at least age 70 ½. And you must actually be 70 ½, not turning 70 ½ later in the year.

Example: Leroy, age 75, died peacefully in his sleep. Leroy had an IRA RMD for $40,000 that he had yet to take. Leroy named his sister Matilda, age 73, and his brother Ron, age 69, as his IRA beneficiaries. Matilda and Ron are responsible for taking Leroy’s $40,000 year-of-death RMD. It does not matter how it is divided between the two. Matilda knew that Leroy wanted to do a QCD for his entire RMD amount to a local charity. Matilda does not need the money. Since she is over age 70 ½, she tells Ron that she will honor Leroy’s wishes and cover the full year-of-death RMD with a QCD from her new inherited IRA. This will satisfy the year-of-death RMD and minimize the tax hit to Ron. (Since Ron is only 69, he cannot do a QCD yet and would have had to take a taxable distribution of his portion of the year-of-death RMD.)