Inherited IRA RMD Shocker

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Kagord
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Inherited IRA RMD Shocker

Post by Kagord »

Not sure if there are any experts on here for complicated inherited IRAs, but I thought I'd give it a go before hiring an estate CPA to review. Any help greatly appreciated. And maybe people who have trusts as their IRA beneficiary perusing this post may learn something about tax impacts of this strategy.

Can someone please explain this to me, it's the first year I have to take an RMD, and it's a whopping 90% (1.1 factor).

Traditional IRA Details
IRA Owner DoB: 1/25/1929
IRA Owner DoD: 3/5/2015
Beneficiary: Qualified Trust, handled as "see through" for RMDs by trust CPA (Spouse Income, Remainder Beneficiaries Children)
Spouse DoB: 8/6/1927 (oldest beneficiary on the trust)
Spouse DoD: 2019 (full RMD was taken that year prior to passing, this is pre secure act)
Assets transferred in kind to children to IRA custodial accounts in 2019

Plugging all this in on multiple inherited IRA calculator sites are all yielding a 1.1 RMD factor, which is a 90% distribution. I can't figure out how this ties to any life expectancy table in pub 590-B, spouse would be 94 years, IRA owner 92, I can't find anything close to 1.1 for these ages. Am I calculating this properly and how are these calculators coming up with 1.1? Or am I supposed to treat as a regular inherited IRA at this point.

Example Calc Site: https://content.schwab.com/ira/understa ... rited-rmd/
Alan S.
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Re: Inherited IRA RMD Shocker

Post by Alan S. »

Kagord wrote: Tue Jun 22, 2021 6:05 am Not sure if there are any experts on here for complicated inherited IRAs, but I thought I'd give it a go before hiring an estate CPA to review. Any help greatly appreciated. And maybe people who have trusts as their IRA beneficiary perusing this post may learn something about tax impacts of this strategy.

Can someone please explain this to me, it's the first year I have to take an RMD, and it's a whopping 90% (1.1 factor).

Traditional IRA Details
IRA Owner DoB: 1/25/1929
IRA Owner DoD: 3/5/2015
Beneficiary: Qualified Trust, handled as "see through" for RMDs by trust CPA (Spouse Income, Remainder Beneficiaries Children)
Spouse DoB: 8/6/1927 (oldest beneficiary on the trust)
Spouse DoD: 2019 (full RMD was taken that year prior to passing, this is pre secure act)
Assets transferred in kind to children to IRA custodial accounts in 2019

Plugging all this in on multiple inherited IRA calculator sites are all yielding a 1.1 RMD factor, which is a 90% distribution. I can't figure out how this ties to any life expectancy table in pub 590-B, spouse would be 94 years, IRA owner 92, I can't find anything close to 1.1 for these ages. Am I calculating this properly and how are these calculators coming up with 1.1? Or am I supposed to treat as a regular inherited IRA at this point.

Example Calc Site: https://content.schwab.com/ira/understa ... rited-rmd/
Surprise - I actually agree with the 1.1 divisor for 2021.

IRA owner passed after their RBD, and a beneficiary is allowed to use the remaining LE of the decedent if longer than that of the designated qualified trust beneficiary, which in this case was the older spouse. In these cases, Table I should be entered at the age of decedent in year of death which was 86. Divisor for first beneficiary RMD year (2016) is based on the age 86 divisor (7.1) less 1.0 for 2016 and each year thereafter including 2020 even though 2020 RMDs were waived. 2021 is 6th year and divisor has been reduced to 1.1 for each of the successor beneficiaries.

As indicated, depending on investment results, this will either drain the inherited IRAs or leave a small portion left over for a complete distribution in 2022. As it turned out, it did not matter whether the trust was qualified for look through or not.
bsteiner
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Re: Inherited IRA RMD Shocker

Post by bsteiner »

Why did the IRA owner leave the IRA in trust for a spouse in his/her late 80s? If the IRA owner had left it to the spouse outright, the spouse could have rolled it over into his/her own IRA and named new beneficiaries such as trusts for the children (or, if the children had other assets, trusts for the grandchildren) and obtained a much longer stretch.

Why didn't the spouse disclaim his/her interest in the trust after the IRA owner died? That would have also obtained a much longer stretch.

Didn't the IRA owner's lawyer advise the IRA owner of this while the IRA owner was alive?

Didn't the lawyer handling the IRA owner's estate advise the spouse of this?
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Kagord
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Re: Inherited IRA RMD Shocker

Post by Kagord »

Alan S. wrote: Tue Jun 22, 2021 11:29 am
Kagord wrote: Tue Jun 22, 2021 6:05 am Not sure if there are any experts on here for complicated inherited IRAs, but I thought I'd give it a go before hiring an estate CPA to review. Any help greatly appreciated. And maybe people who have trusts as their IRA beneficiary perusing this post may learn something about tax impacts of this strategy.

Can someone please explain this to me, it's the first year I have to take an RMD, and it's a whopping 90% (1.1 factor).

Traditional IRA Details
IRA Owner DoB: 1/25/1929
IRA Owner DoD: 3/5/2015
Beneficiary: Qualified Trust, handled as "see through" for RMDs by trust CPA (Spouse Income, Remainder Beneficiaries Children)
Spouse DoB: 8/6/1927 (oldest beneficiary on the trust)
Spouse DoD: 2019 (full RMD was taken that year prior to passing, this is pre secure act)
Assets transferred in kind to children to IRA custodial accounts in 2019

Plugging all this in on multiple inherited IRA calculator sites are all yielding a 1.1 RMD factor, which is a 90% distribution. I can't figure out how this ties to any life expectancy table in pub 590-B, spouse would be 94 years, IRA owner 92, I can't find anything close to 1.1 for these ages. Am I calculating this properly and how are these calculators coming up with 1.1? Or am I supposed to treat as a regular inherited IRA at this point.

Example Calc Site: https://content.schwab.com/ira/understa ... rited-rmd/
Surprise - I actually agree with the 1.1 divisor for 2021.

IRA owner passed after their RBD, and a beneficiary is allowed to use the remaining LE of the decedent if longer than that of the designated qualified trust beneficiary, which in this case was the older spouse. In these cases, Table I should be entered at the age of decedent in year of death which was 86. Divisor for first beneficiary RMD year (2016) is based on the age 86 divisor (7.1) less 1.0 for 2016 and each year thereafter including 2020 even though 2020 RMDs were waived. 2021 is 6th year and divisor has been reduced to 1.1 for each of the successor beneficiaries.

As indicated, depending on investment results, this will either drain the inherited IRAs or leave a small portion left over for a complete distribution in 2022. As it turned out, it did not matter whether the trust was qualified for look through or not.
Thank you for this response, obviously this was an example of how not to plan an estate.
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celia
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Re: Inherited IRA RMD Shocker

Post by celia »

Actually, this is what we often recommend—to do what’s best for the IRA owner and let the heirs worry about the tax.

Even after paying tax (at your tax brackets), you will still come out ahead. And if you haven’t taken control of your piece of the IRA yet, you can disclaim it.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Kagord
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Re: Inherited IRA RMD Shocker

Post by Kagord »

Why: multiple marriages, trying to solve two problems, income to spouse, capital to bloodline, and not maintaining estate documents for over 2 decades doesn't help.

Well, planning for what you think will happen, and as well meaning as one thinks they can be (and grateful that I am to be thought of), what actually ends up happening doesn't always coincide with what life throws at you.
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celia
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Re: Inherited IRA RMD Shocker

Post by celia »

There have been several changes to IRA and tax code in the last few years. Even someone who had a “perfect” estate plan 5 years ago but then became incapacitated could easily have things turn out differently than they wanted.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
chemocean
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Re: Inherited IRA RMD Shocker

Post by chemocean »

Why is this the first year you need to take the RMD?
You indicated that the primary beneficiary (spouse) died in 2019, without taking the 2019 RMD.
Some beneficiary needs to take the 2019 RMD based on divisor of 3.1,
Then the successor beneficiary need to take the 2020 RMD based on division of 2.1, AND the 2021 based on a divisor of 1.1 by April 30, 2021 (unless the CARES act extended that deadline).
chemocean
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Re: Inherited IRA RMD Shocker

Post by chemocean »

chemocean wrote: Tue Jun 22, 2021 3:26 pm Why is this the first year you need to take the RMD?
You indicated that the primary beneficiary (spouse) died in 2019, without taking the 2019 RMD.
Some beneficiary needs to take the 2019 RMD based on divisor of 3.1,
Then the successor beneficiary need to take the 2020 RMD based on division of 2.1, AND the 2021 based on a divisor of 1.1 by April 30, 2021 (unless the CARES act extended that deadline).
Forgot RMDs were not required in 2020. Don't think that absolves the primary beneficiary's 2019 year of death RMD to be taken by the successor beneficary.
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Kagord
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Re: Inherited IRA RMD Shocker

Post by Kagord »

chemocean wrote: Tue Jun 22, 2021 3:30 pm
chemocean wrote: Tue Jun 22, 2021 3:26 pm Why is this the first year you need to take the RMD?
You indicated that the primary beneficiary (spouse) died in 2019, without taking the 2019 RMD.
Some beneficiary needs to take the 2019 RMD based on divisor of 3.1,
Then the successor beneficiary need to take the 2020 RMD based on division of 2.1, AND the 2021 based on a divisor of 1.1 by April 30, 2021 (unless the CARES act extended that deadline).
Forgot RMDs were not required in 2020. Don't think that absolves the primary beneficiary's 2019 year of death RMD to be taken by the successor beneficary.
2019 RMD was taken in full prior to passing, 1099-R to the trust, estate tax rate paid.
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Kagord
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Re: Inherited IRA RMD Shocker

Post by Kagord »

It's not the end of the world, but it is a decent amount, and I put in Turbotax, and, as well as raising my marginal tax rate, it's going to cause me to lose the child tax credit, college tax credits, potential future stimmy payments, and the spousal IRA deduction. I dislike paying taxes.

Are there any other options here besides the 1.1 divisor.

I'm already maxing everything I can, taking a net 3K capital loss, HSA, even the 401K, which will result in an HCE reimbursement.
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David Jay
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Re: Inherited IRA RMD Shocker

Post by David Jay »

Kagord wrote: Thu Jun 24, 2021 8:51 am.Are there any other options here besides the 1.1 divisor.
You could disclaim the inheritance…
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fposte
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Re: Inherited IRA RMD Shocker

Post by fposte »

Kagord wrote: Thu Jun 24, 2021 8:51 am It's not the end of the world, but it is a decent amount, and I put in Turbotax, and, as well as raising my marginal tax rate, it's going to cause me to lose the child tax credit, college tax credits, potential future stimmy payments, and the spousal IRA deduction. I dislike paying taxes.

Are there any other options here besides the 1.1 divisor.
Beneficiaries over 70 1/2 (which judging from the decedent's age they could be) may be able to take the RMD as a Qualified Charitable Deduction, but of course that means forgoing the cash.
Katietsu
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Re: Inherited IRA RMD Shocker

Post by Katietsu »

David Jay wrote: Thu Jun 24, 2021 9:43 am
Kagord wrote: Thu Jun 24, 2021 8:51 am.Are there any other options here besides the 1.1 divisor.
You could disclaim the inheritance…
Not anymore. Too long ago.

You may have been better making a withdrawal in 2020 even though not required. But it is too late to consider that situation as well.

Glad to see that you do still appreciate the inheritance more than you are annoyed by the taxes. Not everyone does.
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ThePrune
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Re: Inherited IRA RMD Shocker

Post by ThePrune »

Hi Kagord,

The question of how to correctly calculate the RMD in this situation is actually more complicated that Alan S. has implied.

I took the time this evening to skim through my legal textbook that covers all details of Tusts as beneficiaries of IRAs. Specifically, this is Natalie Choate's Life and Death Planning for Retirement Benefits, 8th Edition (https://ataxplan.com/life-and-death-pla ... -benefits/). The exact terms of the trust as they apply to the IRA, and instructions contained in the trust as to distributions from the IRA can modify the RMD rules. Specifically:

(1) If the detailed trust language makes clear that only RMD income may be distributed to the surviving spouse, then the non-recalculating Single Life Expectancy method would be used to calculate the RMD (which is what Alan S illustrated.)

(2) But if the detailed trust language states (or implies) that ALL distributions from the IRA must be paid out to the surviving spouse, then the annually recalculating Single Life Expectancy method would be used to calculate the RMD.

All I'm trying to point out here is that this sort of situation (involving IRAs and Trusts) can get incredibly complicated. There are over 90 pages in Natalie Choate's textbook devoted to this topic! This is exactly the sort of question that can be very hard to accurately handle in a Forum such as this one.
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Re: Inherited IRA RMD Shocker

Post by Kagord »

ThePrune wrote: Thu Jun 24, 2021 8:17 pm Hi Kagord,

The question of how to correctly calculate the RMD in this situation is actually more complicated that Alan S. has implied.

I took the time this evening to skim through my legal textbook that covers all details of Tusts as beneficiaries of IRAs. Specifically, this is Natalie Choate's Life and Death Planning for Retirement Benefits, 8th Edition (https://ataxplan.com/life-and-death-pla ... -benefits/). The exact terms of the trust as they apply to the IRA, and instructions contained in the trust as to distributions from the IRA can modify the RMD rules. Specifically:

(1) If the detailed trust language makes clear that only RMD income may be distributed to the surviving spouse, then the non-recalculating Single Life Expectancy method would be used to calculate the RMD (which is what Alan S illustrated.)

(2) But if the detailed trust language states (or implies) that ALL distributions from the IRA must be paid out to the surviving spouse, then the annually recalculating Single Life Expectancy method would be used to calculate the RMD.

All I'm trying to point out here is that this sort of situation (involving IRAs and Trusts) can get incredibly complicated. There are over 90 pages in Natalie Choate's textbook devoted to this topic! This is exactly the sort of question that can be very hard to accurately handle in a Forum such as this one.
Thanks, I'm trying to remember the complexity of how this was done. I believe the RMD went to a taxable trust account as the Inherited IRA beneficiary was solely the trust. Then, to meet the trust spousal life estate income (trust was silent on explicit RMD handling), IRA/Trust accounting income less estate tax/expenses (income related) was distributed and K1'd to the spouse. There was an extremely complex trust principal and accounting income ledger with sub detail tables, that kept track of trust principal and income and tax impacts for each. For instance, a capital gain in the trust was principal, dividends/interest were income, bond sales were complex with both components, as were tax treatments to estimate principal or income impacts of those taxes. Back to the RMD, in effect, the RMD had a principal (remainder beneficiaries) and income component (spouse). I think 1 applies, I will use that.
Last edited by Kagord on Thu Jun 24, 2021 10:49 pm, edited 1 time in total.
MathWizard
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Re: Inherited IRA RMD Shocker

Post by MathWizard »

You could always take a QCD for the entire RMD, then it does not affect your taxes at all.

Or take a partial QCD and the rest of the RMD where you get to keep all your tax credits .

Or take the full RMD and max all tax deferred.
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