Announcement

Collapse
No announcement yet.

Inherited IRA and RMDs

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Inherited IRA and RMDs

    Wife recently inherited a SEP-IRA, and I'm looking to get confirmation that I'm reading IRS Publication 590-B for 2021 correctly.

    The original account owner died in 2021, well prior to the Required Beginning Date. My wife is a non-eligible designated beneficiary.

    From my reading, she qualifies for the 10-year rule and as such is eligible, but not required, to make distributions from the account (bottom of page 11) in any given year prior to year 10.

    And of course, the account must be distributed in full by the end of the 10th year.

    There is no plan to take non-required distributions and we of course want to let this ride for 10 years, but also want to make sure that my interpretation is correct and that there won't be any nasty 50% penalty waiting down the line.

    For some reason I was previously under the impression that RMDs were just part of the deal with an inherited IRA, but now that I'm in the weeds it doesn't seem that way and I'm wondering if I'm mistaken. No actions taken yet.

    Would greatly appreciate confirmation or correction from some of the more tax- and account-savvy members.

  • #2
    The IRS has issued a confounding interpretation requiring RMDs:

    https://forum.whitecoatinvestor.com/...inherited-iras

    https://www.regulations.gov/document/IRS-2022-0003-0001

    I wouldn’t make any definitive plans until closer to the end of the year. Right now it’s clear as mud.

    Comment


    • #3
      No surprise there. Frustrating.

      Glad that my confusion was warranted though. Will await further clarification!

      Comment


      • #4
        We need a Spiritrider comment!!

        Comment


        • #5
          As has already been pointed out above, the IRS has issued proposed regulations on this issue. It states that RMDs must be taken, if the decedent dies >= their required beginning date (RBD*) and the beneficiary is not an eligible designated beneficiary (EDB).

          There is no guarantee the proposed regulations will be finalized. After all, Section 529 was passed into law in 1996 and we still have no final 529 regulations. However, I have read these new regulations and unlike the earlier Publication 590-B fiasco, they are soundly reasoned.

          While I think it is highly likely these regulations become final. I 2nd all the suggestions to wait until later in the year. I am almost certain that no penalties for 2021 will apply. At worst a late distribution and a Form 5329 waiver would be required and the IRS might even waive these RMDs for 2021.

          *As there is no RBD for Roth IRA distributions this does apply to inherited Roth IRA accounts.

          OP, unless this is a Roth IRA or you will be in the top two (2) tax bracket for the next dozen years. There should be a tax efficient plan to take non-required distributions before the end of the tenth (10th) year.

          Depending on your marginal tax rates, it most often would make sense to pick a targeted AGI. Then take distributions each year up to that amount. It seldom makes sense to defer at current lower tax rates to pay higher tax rates later.

          Comment


          • #6
            Originally posted by spiritrider View Post
            As has already been pointed out above, the IRS has issued proposed regulations on this issue. It states that RMDs must be taken, if the decedent dies >= their required beginning date (RBD*) and the beneficiary is not an eligible designated beneficiary (EDB).

            There is no guarantee the proposed regulations will be finalized. After all, Section 529 was passed into law in 1996 and we still have no final 529 regulations. However, I have read these new regulations and unlike the earlier Publication 590-B fiasco, they are soundly reasoned.

            While I think it is highly likely these regulations become final. I 2nd all the suggestions to wait until later in the year. I am almost certain that no penalties for 2021 will apply. At worst a late distribution and a Form 5329 waiver would be required and the IRS might even waive these RMDs for 2021.

            *As there is no RBD for Roth IRA distributions this does apply to inherited Roth IRA accounts.

            OP, unless this is a Roth IRA or you will be in the top two (2) tax bracket for the next dozen years. There should be a tax efficient plan to take non-required distributions before the end of the tenth (10th) year.

            Depending on your marginal tax rates, it most often would make sense to pick a targeted AGI. Then take distributions each year up to that amount. It seldom makes sense to defer at current lower tax rates to pay higher tax rates later.
            I appreciate you chiming in. Very helpful.

            And yes, I see how targeting an annual AGI based on tax bracket would be the most efficient way to go about this.

            It'll likely end up being a combination of targeted distributions with a larger amount taken in 10th year to hit the efficient frontier between growth and taxes, as it were. We'll hopefully be able to find a good way to make that work.

            Will sit tight for finalization of the proposed regulations...but won't be holding my breath.

            Thanks all!

            Comment


            • #7
              Sounds like you have a plan, but allow me to sympathize. It is startling to realize how confusing our various inheritance and transfer on death rules are. Your wife’s conundrum represents a specific case in the broader range of what to do with structured retirement funds. (I agree with targeted annual withdrawals by the way.) For example, between the two of us my wife and I have eight retirement plans. What a nightmare for our kids if we get hit by the proverbial bus. I’ll be consolidating as soon as we can after retirement.

              Comment


              • #8
                “What a nightmare for our kids if we get hit by the proverbial bus. I’ll be consolidating as soon as we can after retirement.”
                As you know, probate attorneys don’t focus on taxes. They focus on settling the estate. Once you pass, many of the consolidation options disappear. A financial POA terminates upon death.
                Sooner the better for the beneficiaries.
                Most beneficiaries end up with a goal of just getting the estate distributed.

                Comment

                Working...
                X