RMDs on Inherited Accounts

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rich126
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RMDs on Inherited Accounts

Post by rich126 »

This year I will have to start RMDs on inherited accounts from my father. I'm just starting retirement (might work ~6 months this year but we'll see) and have never needed to do RMDs previously.

I believe I understand what amount I need to remove from the inherited accounts. My question is there anything special I have to do to notify someone (brokerage, IRS) that I have completed the RMDs?

In my case all of the money is now located at Fidelity. My plan is to take the correct amount based on the divisor from each of the accounts (multiple accounts since my father had accounts at a couple of brokerages before I consolidated them at Fidelity).

Do I just transfer the money out and into my personal account and then next tax season submit documentation to the IRS showing what was done?

It isn't a huge sum so I'm not too concerned with taxes but just want to make sure I do the withdrawal correctly.
Thanks.
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dual
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Re: RMDs on Inherited Accounts

Post by dual »


My question is there anything special I have to do to notify someone (brokerage, IRS) that I have completed the RMDs?
No. It is up to you to decide how much to withdraw and to be sure of that amount is more than the RMD. Transfer the amount from your IRA to your taxable account. Next year, the broker will issue a 1099-R with the amount withdrawn. Enter that as income to your tax form and pay taxes on it.
Kattywompus
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Re: RMDs on Inherited Accounts

Post by Kattywompus »

When did you inherit? As an adult child inheriting in 2020 or later, I think you just have to take it all out within 10 years, but there aren't rules as to when you do it or how much per year. There are variations, though. You might look at:

https://investor.vanguard.com/inheritin ... rited-iras
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KingRiggs
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Re: RMDs on Inherited Accounts

Post by KingRiggs »

When did your father pass? Different rules apply depending on whether he passed before or after the SECURE Act came into effect.

Had he started RMDs prior to his death?

These are important bits of information.
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Speckles
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Re: RMDs on Inherited Accounts

Post by Speckles »

I’m sorry for your loss.

Have you decided if you want to have any tax withheld?

Also, Fidelity has a department that specializes in assisting with RMD. If desired, you could call and verify that their RMD calc matches yours. With inherited IRAs there are nuances that depend on the date of birth of the original depositer, and whether the IRA went to you directly as a beneficiary or to an estate account then you.

I found Fidelity very helpful but be sure to check their interpretations too. Some years the first Fidelity reps made mistakes by assuming some things (eg passed through estate or not), but they also had the resources to get it right in the end.

Specks
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rich126
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Re: RMDs on Inherited Accounts

Post by rich126 »

I'm aware of how I have to do the withdrawals from previous questions here and a very useful Morningstar article. My only question was the actual process of doing the withdrawal. Do I just make the withdrawals and then submit paperwork to the IRS next April? Or do I need to do something else?
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stan1
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Re: RMDs on Inherited Accounts

Post by stan1 »

We use Vanguard not Fidelity, but does Fidelity have an RMD tool built into their account user interface that you could use? Also calling is a good idea to walk through the process the first time.

With an inherited IRA at Vanguard you enter in the required data to make the calculation and it computes the RMD you need to take out, then you have a number of choices on how to take it out and whether to take withholding of federal and state taxes.

Also, if you are over 70.5 wanted to make sure you knew you can do a Qualified Charitable Distribution (QCD) from an Inherited IRA.
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Re: RMDs on Inherited Accounts

Post by chemocean »

rich126 wrote: Tue Mar 21, 2023 12:39 pm I'm aware of how I have to do the withdrawals from previous questions here and a very useful Morningstar article. My only question was the actual process of doing the withdrawal. Do I just make the withdrawals and then submit paperwork to the IRS next April? Or do I need to do something else?
You don't need to submit anything, You will get a 1099-R with the code "4" in box 7, which means it is a withdrawal from an inherited IRA. This spring you should receive a form 5XXX in which Fidelity will tell the IRA and you what the value of the inherited IRA was Dec. 31, 2022. Based on this $ amount, your age at the death of the your father, IRS will know what your RMD is each year I think 1099-R don't need to be submitted unless taxes were withheld. .
Whether you need to take RMDs during the 10 year period is a continuing point of debate on this forum.
Dfgdfg
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Re: RMDs on Inherited Accounts

Post by Dfgdfg »

I have an inherited IRA at Fidelity. When I set it up there was a tool on the website for RMDs. I answered a bunch of questions and it set up an automatic transfer of the required RMD some time in December of each year. I’ve never done anything after this other than handle the 1099 at tax time. It all just happens every year.
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Re: RMDs on Inherited Accounts

Post by Alan S. »

rich126 wrote: Tue Mar 21, 2023 12:39 pm I'm aware of how I have to do the withdrawals from previous questions here and a very useful Morningstar article. My only question was the actual process of doing the withdrawal. Do I just make the withdrawals and then submit paperwork to the IRS next April? Or do I need to do something else?
Request the distribution, and you will get a 1099R next January showing the amount distributed. This simply goes on lines 4a and 4b of your 1040 like any other IRA distribution. There is no separate form or schedule to be added in most situations.

However, if the inherited IRA included non deductible contributions made by your father, you inherited those amounts and you would need Form 8606 to break out the already taxed amount. This will reduce your taxable income, so it's worth checking to determine if such amounts are included. You would look for Form 8606 on father's recent tax returns.

If father passed after his required beginning date, you will have to take annual RMDs. If he passed prior to that date, you don't have annual RMDs, just the 10 year rule, but you might still want to withdraw a portion each year to prevent a large tax bill in year 10.

With respect to withholding, you can decline it or increase the rate. If you do nothing, they will withhold at the default rate of 10%. You cannot withhold at a rate of less than 10% unless you decline it entirely.
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rich126
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Re: RMDs on Inherited Accounts

Post by rich126 »

Thanks.

I may end up calling Fidelity since the divisor they are using is slight different from the one I calculated based on some examples I had seen. Or I might just use the larger withdrawal since it is less than $1K difference.
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HomeStretch
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Re: RMDs on Inherited Accounts

Post by HomeStretch »

To add to the above good feedback…
If your state has mandatory tax withholding on retirement distributions, you may be able to waive the withholding by submitting a form to the brokerage when requesting the distribution.
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Re: RMDs on Inherited Accounts

Post by retired@50 »

rich126 wrote: Wed Mar 22, 2023 6:57 am Thanks.

I may end up calling Fidelity since the divisor they are using is slight different from the one I calculated based on some examples I had seen. Or I might just use the larger withdrawal since it is less than $1K difference.
You might find this exchange between Alan S. and myself useful...

See link: viewtopic.php?p=6911715#p6911715

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
rich126
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Re: RMDs on Inherited Accounts

Post by rich126 »

retired@50 wrote: Wed Mar 22, 2023 9:50 am
rich126 wrote: Wed Mar 22, 2023 6:57 am Thanks.

I may end up calling Fidelity since the divisor they are using is slight different from the one I calculated based on some examples I had seen. Or I might just use the larger withdrawal since it is less than $1K difference.
You might find this exchange between Alan S. and myself useful...

See link: viewtopic.php?p=6911715#p6911715

Regards,
Thanks.

I followed the example in this article. Obviously it could be wrong. https://www.morningstar.com/articles/11 ... -year-rule

Noticed they have a new article that I will read that was just posted.
https://www.morningstar.com/articles/11 ... rited-iras
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retired@50
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Re: RMDs on Inherited Accounts

Post by retired@50 »

rich126 wrote: Wed Mar 22, 2023 10:15 am
retired@50 wrote: Wed Mar 22, 2023 9:50 am
rich126 wrote: Wed Mar 22, 2023 6:57 am Thanks.

I may end up calling Fidelity since the divisor they are using is slight different from the one I calculated based on some examples I had seen. Or I might just use the larger withdrawal since it is less than $1K difference.
You might find this exchange between Alan S. and myself useful...

See link: viewtopic.php?p=6911715#p6911715

Regards,
Thanks.

I followed the example in this article. Obviously it could be wrong. https://www.morningstar.com/articles/11 ... -year-rule

Noticed they have a new article that I will read that was just posted.
https://www.morningstar.com/articles/11 ... rited-iras
I think the first article's example of Joe and Diana (where Diana is Joe's daughter) is helpful - and it seems to be similar to what Alan S. stated in the linked post.

The second (more recent) article discusses what type of beneficiary you are, but not how to calculate an RMD.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
ee_guy
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Re: RMDs on Inherited Accounts

Post by ee_guy »

If the IRA owner is taking RMD during the year of death, but has not taken the full RMD, is the remaining RMD taken from the IRA or the new inherited IRA?
Navillus1968
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Re: RMDs on Inherited Accounts

Post by Navillus1968 »

ee_guy wrote: Sun Mar 26, 2023 10:23 am If the IRA owner is taking RMD during the year of death, but has not taken the full RMD, is the remaining RMD taken from the IRA or the new inherited IRA?
Ed Slott-
"1. Custodians will typically open an inherited IRA for the beneficiary first, transfer all assets to the inherited IRA, and then pay out the year-of-death RMD from the inherited IRA. The Form 1099-R issued for that distribution will include the beneficiary’s social security or tax identification number and will be coded as a death distribution. This payout will be reported on the beneficiary's personal tax return, NOT the estate's tax return."

https://www.irahelp.com/slottreport/year-death-rmd

At the moment of death, the IRA becomes the property of the beneficiary. I don't think the IRS cares whether the year of death RMD comes from the owner's IRA or the inherited IRA, either way the RMD income is taxable to the beneficiary, not the decedent's estate.

Note- if the beneficiary is not an EDB & must liquidate the IRA under the 10 Year rule, it may be smart for him to take more than the year of death RMD out of the account in the year of death. By removing extra funds during the year of death (Year Zero under the 10 Year rule), the beneficiary can spread the income over 11 years vice 10 and pay less taxes per year. If income is expected to be smooth, he withdraws 1/11th of the inherited IRA (year of death RMD + make-up funds= 1/11) in Year Zero, leaving smaller IRA for the Year 1 RMD.
In year 1, he would withdraw 1/10th & continue until Year 10 withdrawal of 1/1, or 100%. Unless the heir is quite old, RMDs alone will not drain the account by year 10, perhaps leading to a 'balloon payment,' with income pushed into a higher marginal tax rate.

This logic may not apply if the beneficiary can foresee a low income year (or years) in the future. In that case it might make sense to make a large withdrawal in a low income year & only take RMDs in the other years.
FromAto401k
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Re: RMDs on Inherited Accounts

Post by FromAto401k »

For post-SECURE Act Is it confirmed that if deceased was already taking RMDs the beneficiary has to take RMDs over the 10 years? Or do they just have to take the year-of-death RMD, but then can leave account alone until end of year 10?
Navillus1968
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Re: RMDs on Inherited Accounts

Post by Navillus1968 »

FromAto401k wrote: Sun Mar 26, 2023 11:39 am For post-SECURE Act Is it confirmed that if deceased was already taking RMDs the beneficiary has to take RMDs over the 10 years? Or do they just have to take the year-of-death RMD, but then can leave account alone until end of year 10?
For a non-Eligible designated Beneficiary (non-EDB), if the decedent was past his RBD, then the heir has mandatory RMDs AND the 10 year rule applies. The heir can also take a lump sum & liquidate the IRA.

For an Eligible designated Beneficiary (EDB), there are several options (spouse vs non-spouse, etc.).
If the decedent was past his RBD, then the heir can opt for mandatory RMDs AND he can use the old stretch IRA rules over his life expectancy.
If the EDB heir opts for the 10 year rule, there are no RMDs but the 10 Year rule applies.
Spouses have the unique option to assume the inherited IRA (treat it as their own IRA), which has different RMD rules.

It's complex & confusing, to say the least.

Schwab-
"Designated Beneficiaries:

If you do not meet the requirements to be considered an Eligible Designated Beneficiary, then if the account holder died after 2019, you will be considered a Designated Beneficiary and you will be required to:
  • Fully distribute all assets by the end of the tenth year after the year the account holder died
  • If the account owner had reached their required beginning date to start taking Required Minimum Distributions (RMDs) before they died, you will also be required to continue to take RMDs during the 10-year period"
.
https://www.schwab.com/ira/inherited-an ... awal-rules

These are Trad IRA rules, Roth IRA owners never reach RBD, so rules are different.
FromAto401k
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Re: RMDs on Inherited Accounts

Post by FromAto401k »

Navillus1968 wrote: Sun Mar 26, 2023 12:44 pm
FromAto401k wrote: Sun Mar 26, 2023 11:39 am For post-SECURE Act Is it confirmed that if deceased was already taking RMDs the beneficiary has to take RMDs over the 10 years? Or do they just have to take the year-of-death RMD, but then can leave account alone until end of year 10?
For a non-Eligible designated Beneficiary (non-EDB), if the decedent was past his RBD, then the heir has mandatory RMDs AND the 10 year rule applies. The heir can also take a lump sum & liquidate the IRA.

For an Eligible designated Beneficiary (EDB), there are several options (spouse vs non-spouse, etc.).
If the decedent was past his RBD, then the heir can opt for mandatory RMDs AND he can use the old stretch IRA rules over his life expectancy.
If the EDB heir opts for the 10 year rule, there are no RMDs but the 10 Year rule applies.
Spouses have the unique option to assume the inherited IRA (treat it as their own IRA), which has different RMD rules.

It's complex & confusing, to say the least.

Schwab-
"Designated Beneficiaries:

If you do not meet the requirements to be considered an Eligible Designated Beneficiary, then if the account holder died after 2019, you will be considered a Designated Beneficiary and you will be required to:
  • Fully distribute all assets by the end of the tenth year after the year the account holder died
  • If the account owner had reached their required beginning date to start taking Required Minimum Distributions (RMDs) before they died, you will also be required to continue to take RMDs during the 10-year period"
.
https://www.schwab.com/ira/inherited-an ... awal-rules

These are Trad IRA rules, Roth IRA owners never reach RBD, so rules are different.
This does not seem to match the language in the recent IRS publication: https://www.irs.gov/publications/p590b

"10-year rule. The 10-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner’s death. For example, if the owner died in 2022, the beneficiary would have to fully distribute the IRA by December 31, 2032. The beneficiary is allowed, but not required, to take distributions prior to that date."
Navillus1968
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Re: RMDs on Inherited Accounts

Post by Navillus1968 »

FromAto401k wrote: Mon Mar 27, 2023 1:50 pm
Navillus1968 wrote: Sun Mar 26, 2023 12:44 pm
FromAto401k wrote: Sun Mar 26, 2023 11:39 am For post-SECURE Act Is it confirmed that if deceased was already taking RMDs the beneficiary has to take RMDs over the 10 years? Or do they just have to take the year-of-death RMD, but then can leave account alone until end of year 10?
For a non-Eligible designated Beneficiary (non-EDB), if the decedent was past his RBD, then the heir has mandatory RMDs AND the 10 year rule applies. The heir can also take a lump sum & liquidate the IRA.

For an Eligible designated Beneficiary (EDB), there are several options (spouse vs non-spouse, etc.).
If the decedent was past his RBD, then the heir can opt for mandatory RMDs AND he can use the old stretch IRA rules over his life expectancy.
If the EDB heir opts for the 10 year rule, there are no RMDs but the 10 Year rule applies.
Spouses have the unique option to assume the inherited IRA (treat it as their own IRA), which has different RMD rules.

It's complex & confusing, to say the least.

Schwab-
"Designated Beneficiaries:

If you do not meet the requirements to be considered an Eligible Designated Beneficiary, then if the account holder died after 2019, you will be considered a Designated Beneficiary and you will be required to:
  • Fully distribute all assets by the end of the tenth year after the year the account holder died
  • If the account owner had reached their required beginning date to start taking Required Minimum Distributions (RMDs) before they died, you will also be required to continue to take RMDs during the 10-year period"
.
https://www.schwab.com/ira/inherited-an ... awal-rules

These are Trad IRA rules, Roth IRA owners never reach RBD, so rules are different.
This does not seem to match the language in the recent IRS publication: https://www.irs.gov/publications/p590b

"10-year rule. The 10-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner’s death. For example, if the owner died in 2022, the beneficiary would have to fully distribute the IRA by December 31, 2032. The beneficiary is allowed, but not required, to take distributions prior to that date."
That IRS document is extremely poorly written.

The quote you cite covers "IRA beneficiaries who are not taking life expectancy payments" so of course RMDs don't apply.

Here's Fidelity- https://www.fidelity.com/building-savin ... ed-ira-rmd
Right side of page: "I am an eligible designated or non-eligible designated beneficiary of the original IRA owner."
Click "Learn more and withdraw" & a pop-up window appears with the following verbiage:

"Post Required Beginning Date
  • Transfer to an Inherited IRA and take required minimum distributions based on the longer of the decedent's life expectancy or the beneficiary's life expectancy."
Both Schwab & Fidelity believe beneficiary RMDs are mandatory if the IRA owner died after his RBD. I am content to let the various IRA custodians decipher the IRS goat entrails & tell me what they mean.
It would be nice if the IRS included a flow chart in their documents so that you could trace your situation from A to Z, but they didn't.
Golfalot
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Re: RMDs on Inherited Accounts

Post by Golfalot »

This is a very timely thread as I was just going to post a similar/related question. My father recently passed and I am right in the middle of handling his estate and his 2 existing IRAs. My mom is the surviving spouse and the named beneficiary on the IRAs. My mom has an existing Traditional IRA that I was planning on transferring my Dad's 2 IRAs to. My Dad was 84 and had already begun taking RMD's. He had not taken any RMD's for 2023. My mom is 85.

Now my question.....can I take my Dad's 2023 year of death RMD from my Mom's Traditional IRA once I've transferred the inherited amounts into her IRA?

I've read online that spouses have option to transfer inherited IRA's into their existing IRA's. So just want to make sure it is okay to take the deceased spouses RMD's for year of death from the existing traditional IRA.

FYI....My mom's IRA is at Fidelity, and the Fidelity advisor had recommended setting up a new "Inherited IRA" for my mom that my Dad's IRA would be transferred into and then take the RMD from there. This would result in my mom having 2 IRA's at Fidelity (her Traditional IRA and this Inherited IRA). I am all about simplicity and don't necessarily want to have 2 IRA's for her.

Thanks in advance.
Navillus1968
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Re: RMDs on Inherited Accounts

Post by Navillus1968 »

Golfalot wrote: Mon Mar 27, 2023 7:22 pm This is a very timely thread as I was just going to post a similar/related question. My father recently passed and I am right in the middle of handling his estate and his 2 existing IRAs. My mom is the surviving spouse and the named beneficiary on the IRAs. My mom has an existing Traditional IRA that I was planning on transferring my Dad's 2 IRAs to. My Dad was 84 and had already begun taking RMD's. He had not taken any RMD's for 2023.

Now my question.....can I take my Dad's 2023 year of death RMD from my Mom's Traditional IRA once I've transferred the inherited amounts into her IRA?
According to Ed Slott, the answer is Yes:
"The IRS only cares that the year-of-death RMD is taken. It does not care from whose account the RMD is distributed. When a spouse inherits an IRA, she can take the year-of-death RMD from her own IRA"
https://www.irahelp.com/slottreport/yea ... -rollovers
I've read online that spouses have option to transfer inherited IRA's into their existing IRA's. So just want to make sure it is okay to take the deceased spouses RMD's for year of death from the existing traditional IRA.

FYI....My mom's IRA is at Fidelity, and the Fidelity advisor had recommended setting up a new "Inherited IRA" for my mom that my Dad's IRA would be transferred into and then take the RMD from there. This would result in my mom having 2 IRA's at Fidelity (her Traditional IRA and this Inherited IRA). I am all about simplicity and don't necessarily want to have 2 IRA's for her.

Thanks in advance.
I'm pretty sure the bolded sentence is bad advice!

By 'assuming' your Dad's 2 IRAs (treating them as her own IRA), your Mom can continue to use Table III IRS uniform lifetime table to calculate her RMDs. An Inherited IRA must use Table I (IRS Single Life Expectancy Table), which has much higher RMDs for any given year. No bueno.

Example- Mom is 80, Table III divisor is 20.2, Table I divisor is 11.2. With 20.2 divisor= RMD is 4.9% of the IRA, with 11.2 divisor= RMD is 8.9% of the IRA, quite a bit larger. Larger RMD means more taxes & the IRA is drained faster. Neither is good.

Sorry for your loss.

PS- Make sure Mom has updated her IRA beneficiary at the Fidelity website, both Primary & Contingent. Chances are good your Dad was her Primary.
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Re: RMDs on Inherited Accounts

Post by Golfalot »

Navillus1968, thank you for the guidance. This is very much appreciated and seems spot on. I was fortunate to have a Dad who was very well prepared. On yearly basis, he would provide me a 3 page "if something happens to me" letter with every little detail regarding his finances & bills, etc..
Navillus1968
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Re: RMDs on Inherited Accounts

Post by Navillus1968 »

Golfalot wrote: Tue Mar 28, 2023 7:34 am Navillus1968, thank you for the guidance. This is very much appreciated and seems spot on. I was fortunate to have a Dad who was very well prepared. On yearly basis, he would provide me a 3 page "if something happens to me" letter with every little detail regarding his finances & bills, etc..
There are instances where the Inherited IRA option is useful for a spouse. The classic example is a younger spouse who inherits before she turns 59.5 but needs income from the spouse's IRA. If she were to assume her husband's IRA & treat it as her own money, that money would have a penalty attached if she then withdrew from her IRA underage. If a pre-59.5 spouse needs income from the IRA, then the Inherited IRA becomes more attractive, since Inherited IRA RMDs before 59.5 are penalty-free (but not tax-free, of course).
Kattywompus
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Re: RMDs on Inherited Accounts

Post by Kattywompus »

I'm also dealing with an inherited IRA from a parent who died in December 2022, so I am a non-eligible designated beneficiary. The question that I keep running across is whether Rule of 10 has any RMD requirements. The Schwab website linked in a previous post https://www.schwab.com/ira/inherited-an ... awal-rules says:
Designated Beneficiaries:
If you do not meet the requirements to be considered an Eligible Designated Beneficiary, then if the account holder died after 2019, you will be considered a Designated Beneficiary and you will be required to:
  • Fully distribute all assets by the end of the tenth year after the year the account holder died
  • If the account owner had reached their required beginning date to start taking Required Minimum Distributions (RMDs) before they died, you will also be required to continue to take RMDs during the 10-year period.
However, the Schwab brochure that the page links to https://www.schwab.com/resource/lets-ta ... -inherited says on page 7:
You can access your funds at any time, and taxable distributions are included in your gross income—as long as the money is distributed within 10 years.
• The only requirement is that all assets in the account must be distributed within 10 years. Within that time, you can distribute the assets however you like.
I contacted Vanguard, and they said that when the SECURE Act was being discussed, there were concerns that the 10-year rule would also include RMDs, but that was not actually included in the law.
Navillus1968
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Re: RMDs on Inherited Accounts

Post by Navillus1968 »

Kattywompus wrote: Tue Mar 28, 2023 12:23 pm I'm also dealing with an inherited IRA from a parent who died in December 2022, so I am a non-eligible designated beneficiary. The question that I keep running across is whether Rule of 10 has any RMD requirements. The Schwab website linked in a previous post https://www.schwab.com/ira/inherited-an ... awal-rules says:
Designated Beneficiaries:
If you do not meet the requirements to be considered an Eligible Designated Beneficiary, then if the account holder died after 2019, you will be considered a Designated Beneficiary and you will be required to:
  • Fully distribute all assets by the end of the tenth year after the year the account holder died
  • If the account owner had reached their required beginning date to start taking Required Minimum Distributions (RMDs) before they died, you will also be required to continue to take RMDs during the 10-year period.
However, the Schwab brochure that the page links to https://www.schwab.com/resource/lets-ta ... -inherited says on page 7:
You can access your funds at any time, and taxable distributions are included in your gross income—as long as the money is distributed within 10 years.
• The only requirement is that all assets in the account must be distributed within 10 years. Within that time, you can distribute the assets however you like.
I contacted Vanguard, and they said that when the SECURE Act was being discussed, there were concerns that the 10-year rule would also include RMDs, but that was not actually included in the law.
There is a ton of confusion about Inherited IRAs & RMDs after the SECURE Act and even people who work in finance are confused.

Here's an article from Michael Kitces that spells it out: (https://www.kitces.com/blog/irs-propose ... gh-trusts/)

"Regulations seek to implement a remarkably complex system, whereby Non-Eligible Designated Beneficiaries would be split into two distinct groups, each with their own set of post-death distribution rules.

One group would be comprised of Non-Eligible Designated Beneficiaries who inherited from retirement account owners who died prior to their Required Beginning Date. This group of beneficiaries would be subject to ‘only’ the 10-Year Rule

Non-Eligible Designated Beneficiaries who inherited from retirement account owners who died on or after their Required Beginning Date would comprise the second group. And this group of beneficiaries would be subject to both the 10-Year Rule and ‘regular’ ‘stretch’ distributions."

"‘regular’ ‘stretch’ distributions" is nerd-speak for RMDs. Right below this paragraph is a color-coded flow chart that is quite clear & easy to follow.

If your parent died after his RBD, you must take RMDs & liquidate the IRA under the 10 Year rule (really 11 tax years, if you include year of death).
If your parent died prior to his RBD, you are subject only to the 10 Year rule, no RMDs.

In addition to Michael Kitces, I've seen BH member Alan S say the same thing, so between those two authorities, you can take it to the bank!

Edit: These IRS rules are not yet finalized, but are expected to be finalized soon & will cover tax year 2023 and beyond. I would wait until the IRS issues final regulations on Inherited IRAs before taking a 2023 RMD, but unless the IRS whipsaws everybody by changing its mind again, I would not expect the final regs to rescind the RMD scheme in the proposed regs.
jefmafnl
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Re: RMDs on Inherited Accounts

Post by jefmafnl »

Thank you, Navillus1968, for your excellent suggestion of waiting for the final IRS regulations to be issued.
I guess that the thorough Morningstar article cited above by Rich126

https://www.morningstar.com/articles/11 ... ited-iras

was based on the proposed regulations.

One could do a search on the IRS website to see if the final regulations have been issued. Is there a more efficient way to find out?

Thanks!

J
Alan S.
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Re: RMDs on Inherited Accounts

Post by Alan S. »

jefmafnl wrote: Fri Mar 31, 2023 7:06 am Thank you, Navillus1968, for your excellent suggestion of waiting for the final IRS regulations to be issued.
I guess that the thorough Morningstar article cited above by Rich126

https://www.morningstar.com/articles/11 ... ited-iras

was based on the proposed regulations.

One could do a search on the IRS website to see if the final regulations have been issued. Is there a more efficient way to find out?

Thanks!

J
Finalization of the Regs would be first page financial press news. They have not yet been finalized, but this could occur anytime. The question is how many changes will be made to the 275 pages of proposed Regs issued Feb, 2022.

https://public-inspection.federalregist ... -02522.pdf

RMDs within the 10 year have received most of the attention, and the recent release of Pub 590B is a strong indication that the IRS is not going to reverse course yet again. Annual beneficiary RMDs will be required for 10 year rule beneficiaries when the owner passed on or after their RBD. The actual RBD date is tricky since that age has changed twice in the last 3 years and will change again in about 10 years.

Of course, most taxpayers should take steps to prevent a large distribution in year 10 which could spike the tax rate that year, even if they do not have to take RMDs. But for those who prefer not to take a distribution, no harm in waiting until the Regs go final. At this time, there is no clear indication when that might be, but my guess is not later than September.
jefmafnl
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Re: RMDs on Inherited Accounts

Post by jefmafnl »

Many thanks, Alan S, this is very helpful!

J
Kewpie
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Re: RMDs on Inherited Accounts

Post by Kewpie »

After being 100% confident I had it all straight, I am starting to have trouble understanding RMD requirements on IRAs inherited from a spouse. Here are the facts in this case:

1) Deceased and surviving spouse were the same age (53)
2) Deceased's 401k was rolled into an inherited IRA. It remains as an inherited account.

IRS guidance https://www.irs.gov/publications/p590b# ... k100090119 seems pretty clear that the surviving spouse can leave it as an inherited account and not have to start taking RMDs until the deceased spouse would have had to start in their 70s. This is what I had understood up until now. I assumed the surviving spouse could take ad hoc withdrawals from the account without penalty if needed, which might be useful in the time before age 59.5

But I have been seeing in various online forums that a surviving spouse DOES need to take RMDs - is this ever a requirement if neither person would have been at RMD age during the year?
Navillus1968 wrote: Tue Mar 28, 2023 8:02 am There are instances where the Inherited IRA option is useful for a spouse. The classic example is a younger spouse who inherits before she turns 59.5 but needs income from the spouse's IRA. If she were to assume her husband's IRA & treat it as her own money, that money would have a penalty attached if she then withdrew from her IRA underage. If a pre-59.5 spouse needs income from the IRA, then the Inherited IRA becomes more attractive, since Inherited IRA RMDs before 59.5 are penalty-free (but not tax-free, of course).
Also, the wiki on "Inheriting an IRA" states: "A spouse, however, might decide to forgo a spousal rollover if he/she is under the age of 59 and 1/2 and has a clear need for the income from the IRA. As beneficiary, the surviving spouse is required to take minumum distributions from the account. Withdrawals would be exempt from the 10% early withdrawal penalty tax."

Can someone please help me clear this up?
Navillus1968
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Re: RMDs on Inherited Accounts

Post by Navillus1968 »

Kewpie wrote: Wed Jan 31, 2024 4:23 pm After being 100% confident I had it all straight, I am starting to have trouble understanding RMD requirements on IRAs inherited from a spouse. Here are the facts in this case:

1) Deceased and surviving spouse were the same age (53)
2) Deceased's 401k was rolled into an inherited IRA. It remains as an inherited account.

IRS guidance https://www.irs.gov/publications/p590b# ... k100090119 seems pretty clear that the surviving spouse can leave it as an inherited account and not have to start taking RMDs until the deceased spouse would have had to start in their 70s. This is what I had understood up until now. I assumed the surviving spouse could take ad hoc withdrawals from the account without penalty if needed, which might be useful in the time before age 59.5

But I have been seeing in various online forums that a surviving spouse DOES need to take RMDs - is this ever a requirement if neither person would have been at RMD age during the year?
Navillus1968 wrote: Tue Mar 28, 2023 8:02 am There are instances where the Inherited IRA option is useful for a spouse. The classic example is a younger spouse who inherits before she turns 59.5 but needs income from the spouse's IRA. If she were to assume her husband's IRA & treat it as her own money, that money would have a penalty attached if she then withdrew from her IRA underage. If a pre-59.5 spouse needs income from the IRA, then the Inherited IRA becomes more attractive, since Inherited IRA RMDs before 59.5 are penalty-free (but not tax-free, of course).
Also, the wiki on "Inheriting an IRA" states: "A spouse, however, might decide to forgo a spousal rollover if he/she is under the age of 59 and 1/2 and has a clear need for the income from the IRA. As beneficiary, the surviving spouse is required to take minumum distributions from the account. Withdrawals would be exempt from the 10% early withdrawal penalty tax."

Can someone please help me clear this up?
I think I worded my sentence poorly when I wrote "If a pre-59.5 spouse needs income from the IRA, then the Inherited IRA becomes more attractive, since Inherited IRA RMDs before 59.5 are penalty-free (but not tax-free, of course)."

What I should have said is "distributions before 59.5 are penalty-free (but not tax-free, of course)." IOW, the spouse can withdraw funds from the inherited IRA prior to age 59.5 without penalty, but I don't believe that transaction counts as an RMD or triggers ongoing RMDs. The section of your post I highlighted in red above is correct, I think.

RMDs are technically still required if the IRA is titled as an inherited IRA, but if the IRA owner died at 53, he was obviously prior to his Required Beginning Date for RMDs. Thus, his spouse beneficiary can opt to delay starting RMDs until the year the deceased IRA owner would have reached his RBD age (75) before starting RMDs.

I believe the spouse beneficiary also can elect to treat the inherited IRA as her own IRA as late as the IRA owner's RBD. So, in the year before her husband would have turned 75, she can re-title the IRA in her name instead "Lois Lane as beneficiary of Clark Kent." This allows her to use the Uniform Lifetime Table for RMDs, rather than the less-friendly Single Life Table which empties the IRA faster with bigger RMDs.

Sorry for the confusion- hopefully if I'm still off-base, one of the IRA SMEs will be along soon to correct my post.
solaris17
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Re: RMDs on Inherited Accounts

Post by solaris17 »

Does anyone know if tax withholding on Inherited IRA distributions is treated the same way as Traditional IRA distributions? I.e. can you wait until December to withhold your entire tax obligation for the year without incurring any late tax penalties?
Navillus1968
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Re: RMDs on Inherited Accounts

Post by Navillus1968 »

solaris17 wrote: Wed Jan 31, 2024 5:40 pm Does anyone know if tax withholding on Inherited IRA distributions is treated the same way as Traditional IRA distributions? I.e. can you wait until December to withhold your entire tax obligation for the year without incurring any late tax penalties?
I'm almost positive that withholding from any source goes into a figurative IRS hopper called "2024 withholding for solaris17" & nobody at the IRS knows or cares when the money showed up or where the money came from, as long as it goes in the hopper for the tax year prior to 31 DEC.

Withholding from any source is always annualized, AFAIK- treated as if it was received smoothly over 12 months.
solaris17
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Re: RMDs on Inherited Accounts

Post by solaris17 »

Thank you Navillus1968!
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