An RMD and Tax Waiver Problem (Part 2)

                In my blog post last week I laid out Mary’s problem trying to draw out the required minimum distribution for 2018 from her deceased aunt’s IRA.  June died in November and had not yet taken the minimum necessary (RMD) to avoid a 50% penalty.  The bank holding the IRA, however, has refused to allow Mary to withdraw the balance of the RMD, insisting that a tax waiver from the State of New Jersey is necessary before it can do so.  It has frozen 100% of the account.

                As I explained last week, Mary’s aunt did not have any children and has left her estate to Mary and Mary’s cousins.  They are all nieces and nephews in relation to her aunt and are classified as Class D beneficiaries for inheritance tax purposes.  The tax on the distributions amounts to 15% of the first $700,000 received by each beneficiary and 16% on anything above that.  While the tax is calculated as of the date of death the return and the tax are due 8 months after death because the State recognizes that it takes time for the estate representative to figure out if there is any tax due and if so, how much.

                The tax waiver is issued by the State after it has reviewed the return and agrees with the amount of tax owed and paid.  The bank then knows that it can release the funds.  But the review process can take many months so that the tax waivers in many cases are not issued until over a year after death.

                For this reason, the State permits financial institutions to release up to 50% of the funds on hand without the waiver.  These funds must, however, go to the executor, administrator or joint owner of the account.  Checks written to the State of New Jersey for payment of the inheritance tax directly from the account must also be permitted.

                The bank’s ignorance of this rule could be costly because, as I said, failure to withdraw the RMD carries a 50% penalty on top of anything that should have been withdrawn but wasn’t.  The beneficiary of an individual retirement account becomes the owner once the participant dies.  In this case the estate was the beneficiary so Mary, as executor of the estate has the right to withdraw from the account.

                While it is understandable that the bank may be confused because it typically has account holder is many states, each with its own set of laws, that is why it has a legal department to help keep it all straight.  Ignorance of the law is not a defense to subjecting its account holders to unnecessary penalties.