Inherited IRA, Now What?

[Andre1969]

Inherited an IRA, Now What?

Hey gang, my uncle passed away, on October 27, and left me as the sole beneficiary to his estate. He didn't have any kids of his own. His IRA transferred to me on 11/24/2023. He had just turned 71 on 9/26/2023, so he didn't have to start taking his RMDs yet.

Since I'm not a spouse or minor child, or any of those other sub-groups that changes things, I'm under the impression that I have to have that IRA completely cashed out, by December 31 2033, which would be the year of the 10th anniversary of his death.

Also, since he died before having to take his first RMD, the way I read it is that I can pretty much take distributions as I please? As in, I can take as little or as much out as I want each year, or even leave it all in until the end of 2033, if I wanted?

I know there's another scenario where you have to take out so much each of the ten years, but I think that's if the deceased had already started taking RMDs?

I'm planning to spread it out over the ten years, anyway. While it would be nice to let that sit and grow, tax-deferred, if I pulled it out all at once in 10 years, the tax bill would be huge! Presuming the market does fairly well, during that time.

From what I've read, it looks like even if I had to do the yearly distribution, 2023 would technically be year Zero, as 2024-2032 would be years 1-9 and 2033 would be year Ten.

I'm planning to take out 10% next year, ~11.1% the following, ~12.5 the year after that, etc, to draw it down fairly orderly.

Anyway, I was just hoping for an extra set (or more) of eyes on my situation and plan, to make sure I'm doing the right thing, and haven't missed any details. It's a fairly substantial amount, a bit over $200,000, so if I screwed anything up, the tax/penalty consequences could be pretty severe, I'm presuming.

Thanks, everyone, for any advice/insight you might have!

 

[ncbill]

Yes, right now no need to take annual distributions, RMDs, etc.

You can just leave it in there for a full 10 years if you are willing to take the tax hit at the end of that time.

 

[target2019]

Are there any significant events in the next 10 years that might change your tax status?

Probably not, but it's one thing I thought of.

 

[Andre1969]

Thanks guys, for the replies. I can actually think of a couple things that could change my tax status, over the next ten years.

1) I'm 53 now, and probably hit FI a few years ago. However, the extra financial padding is nice, and I've fallen into OMY syndrome. But, if I was FI before the inheritance, this definitely puts me over the threshold. I'm sort of shooting for retiring around April of 2025, when I'll be 55. Even if I can't break the clutches of OMY, I really can't see myself still working at the end of the 10 year period, when I'll be 63. So, at some point between now and 12/31/2033, I'll most likely be retiring.

2) I'm also set to get a portion of the proceeds of my deceased Grandmom's house, but have no idea how much that will be. I'm thinking it could be anywhere between 60%-100%. This one's going to be messy. The house is in a living trust that Grandmom had set up. When she passed, everything went 40/40/20 to my Mom/Uncle/Me. Mom was handling the estate, and took care of everything but the house. My uncle was living in Grandmom's house, and helped take care of her as she aged, and then stayed there after she passed. Eventually the plan was for him to come live with me, as my house has an in-law suite. But, we moved REALLY slow with that. I think he really didn't want to give up his independence. And, nobody really needed the proceeds from the house, so we weren't in a hurry to get it transferred/sold/etc.

Anyway, Mom ended up getting sick unexpectedly and died this past July. Everything got passed to my stepdad, and I'm supposed to get half of that when he dies...provided I don't piss him off, I guess! My uncle had been in bad health all his life, with kidney issues, on and off cancer, and Lord-knows what else, and finally passed in October.

The house still sits, held in Grandmom's trust. Now I'm guessing what will happen, most-expensive scenario, is that I get 20% of it from Grandmom, and being a direct-line descendant, or whatever they call it, there shouldn't be much tax, unless there's been a big capital gain. I'm guessing the 40% that was supposed to go to my uncle will now go to his estate, and then pass through to me as his sole heir. And not being a direct-line descendant, that will have some tax bill. But what I don't know, is what happens to Mom's 40%. My guess is that it goes to Mom's estate, which then goes to my stepdad.

My stepdad, while a mental wreck at losing Mom, is financially set for life, and says he doesn't care about any proceeds from Grandmom's house. But, I don't know if that it still goes to Mom's estate and then to him, and then he gifts it to me, or what? The whole dealing with the house thing is a bit above my pay grade, so I'm going to talk to the trust lawyer about that. I've just been putting it off.

So, back to the IRA withdrawals, I guess one possible choice might be to delay a distribution in 2024 if I work the whole year and then retire in early 2025, and then use years 2025-2033 to deplete the portfolio? Hopefully, I can get the motivation to get the house sold in 2024 as well, but if it got pushed back to 2025, then maybe condensing the IRA distributions to 2026-2033 might be a better choice?

Going through that house is going to be an adventure. Grandmom and Granddad bought it back in 1950, and both of them were packrats. Not worthy of the "Hoarders" tv show, but still pretty bad. At one point in the early 80's, Granddad built an addition on the side of the garage, maybe 12x25 feet, and it got pretty well-packed.

 

[target2019]

I thought you were retired...

That is a lot to deal with over the coming years. Be nice to yourself and take a distribution this year. Just be sure you stay in the same Fed and State tax brackets so you don't get an extra ding that was not anticipated. That's just a thought, though, so YMMV.

 

[cathy63]

Everything you wrote in your OP sounds correct. If the proposed IRS rules are finalized, you would not be subject to RMDs because your uncle hadn't reached his beginning age when he died; and you do have the 10-year period calculated corrrectly.

Even if you did have to take RMDs, 10% is the RMD for an 81 year old. If you're not that old your plan would already exceed the minimums anyway.

 

[cathy63]

The house still sits, held in Grandmom's trust. Now I'm guessing what will happen, most-expensive scenario, is that I get 20% of it from Grandmom, and being a direct-line descendant, or whatever they call it, there shouldn't be much tax, unless there's been a big capital gain. I'm guessing the 40% that was supposed to go to my uncle will now go to his estate, and then pass through to me as his sole heir. And not being a direct-line descendant, that will have some tax bill. But what I don't know, is what happens to Mom's 40%. My guess is that it goes to Mom's estate, which then goes to my stepdad.

My stepdad, while a mental wreck at losing Mom, is financially set for life, and says he doesn't care about any proceeds from Grandmom's house. But, I don't know if that it still goes to Mom's estate and then to him, and then he gifts it to me, or what? The whole dealing with the house thing is a bit above my pay grade, so I'm going to talk to the trust lawyer about that. I've just been putting it off.

Yes, take the trust paperwork and your Uncle's will and your Mom's will if she had one to the trust attorney and get some help. Probably your Grandmom's trust became irrevocable at her death. If the trust's assets were never distributed and the trust wasn't dissolved before two of the three beneficiaries passed, then it's possible that your stepfather doesn't inherit anything from the trust and the entire house might already be yours. You need someone to read the trust docs and find out what they say. Alternatively, if he is entitled to 40% of the trust assets, then if there are any other bank or investment accounts in the trust, you might be able to give him those while you take the house. Are you the successor trustee as well as the beneficiary of your Grandmom's trust?

Being a "direct line" descendent is irrelevant for income/capital gain tax purposes at the Federal level. There's no special treatment for family members. The only thing that matters is the value of the house on the date(s) you inherited. In your case you have to worry about three different valuations. Your original 20% has a basis from your Grandmom's date of death. Your Uncle's 40% has a basis from his date of death, and your Mom's 40% has a basis from her date of death.

If your state has an inheritance or estate tax, then being a direct-line descendant may matter there. I think it does in Pennsylvania.

If you live in California, then there are property tax reductions for direct descendents who move into the house within a year of inheriting. It sounds like it's been more than a year since your Grandmom died and your Mom didn't live there and you're also not planning to live there, so you couldn't benefit from that anyway.

 

[jastew]

So what are the rules if you inherit an IRA and the deceased had already begun taking RMDs?

 

[Slim11]

I think if you are not a minor you need to withdraw the ira down in 10 years. If not a roth, you owe taxes. So add the distrabution to your earned income. Whatever you are at you pay. If your state has a inheradance tax you pay that also.

On the other thing,
House capital gain is the value or the house when you inherited it vs when the person died. I have no idea if they cost value it out for your uncle etc, as its in a trust, you will need a good accountant! It may go back to the date of death, IDK. I hope someone got an appraisal done.

 

[scrinch]

So what are the rules if you inherit an IRA and the deceased had already begun taking RMDs?

If you're not the spouse or a minor, you have to both take RMD's based on your age, and deplete the entire IRA within 10 years. DW inherited half of her dad's IRA a couple of years ago, and she has to withdraw over 700k within the next 10 years. The IRS has not required RMDs for the last couple of years for some reason (covid?).

 

[TheWizard]

If you're not the spouse or a minor, you have to both take RMD's based on your age, and deplete the entire IRA within 10 years. DW inherited half of her dad's IRA a couple of years ago, and she has to withdraw over 700k within the next 10 years. The IRS has not required RMDs for the last couple of years for some reason (covid?).

Based on your age?
No...

 

[badatmath]

Yep, if distributions have begun, it is based on the inheritees age due to the Secure Act.

here is one example https://www.irahelp.com/slottreport...1k-distributions-today’s-slott-report-mailbag

 

[pb4uski]

.... My stepdad, while a mental wreck at losing Mom, is financially set for life, and says he doesn't care about any proceeds from Grandmom's house. But, I don't know if that it still goes to Mom's estate and then to him, and then he gifts it to me, or what? The whole dealing with the house thing is a bit above my pay grade, so I'm going to talk to the trust lawyer about that. I've just been putting it off. ...

The easiest thing might be for your stepdad to disclaim inheriting your mother's 40% interest in Grandmothers house. In that case, I think what he disclaims would go to you as the only remaining heir of your mother. So you would end up with 100% of grandmother's house... 20% directly from your grandmother, 40% from your mother disclaimed by stepdad and 40% from your uncle.

Who is now the trustee of your grandmother's trust? The trust document should say but the trust document might not have provisions for what happens if the successor trustee dies.

BTW, sorry for all your losses... your grandmother, mother and uncle... wow, that's a lot to absorb.

 

[statsman]

The only thing you might want to watch for is taking a large amount in the last year of the 10-year window. It sounds like you would be 63 when that happens. Be careful of IRMAA in the year you turn 65 and start taking Medicare. It would use the income from the tax year you turned 63. While I agree it can be unwise at times to let the tax-tail wag the dog, I figured I would point it out anyway.

 

[scrinch]

Based on your age?
No...

From TRowePrice guidance on inherited IRAs. It's more concise than direct from the IRS. https://www.troweprice.com/personal-investing/resources/insights/how-laws-governing-inherited-iras-may-mean-changes-to-your-financial-plan.html#:~:text=Individuals%20in%20this%20group%20must,%2DYear%20Drawdown%E2%80%9D%20example.)

Annual withdrawals are only required if the original owner had already reached their RBD. In that case, the RMDs are based on the beneficiary’s single life expectancy, and the account still needs to be liquidated fully by the end of the 10th year following the original owner’s death.

 

[SecretlyFI]

From TRowePrice guidance on inherited IRAs. It's more concise than direct from the IRS. https://www.troweprice.com/personal-investing/resources/insights/how-laws-governing-inherited-iras-may-mean-changes-to-your-financial-plan.html#:~:text=Individuals%20in%20this%20group%20must,%2DYear%20Drawdown%E2%80%9D%20example.)

Annual withdrawals are only required if the original owner had already reached their RBD. In that case, the RMDs are based on the beneficiary’s single life expectancy, and the account still needs to be liquidated fully by the end of the 10th year following the original owner’s death.

Wow I was not aware of this updated guidance. However, I looked up publication 590 and it seems to indicate that non-eligible designated beneficiaries only have to empty the account by the 10 year mark and are not subject to RMD in years 1-9. I believe my husband is a "non-eligible designated beneficiary" of his mother's IRA. She died in 2020 at age 92 and he was 57 at the time. Now I don't know which is true? Would publication 590 include that updated guidance?

From Pub 590:
Owner Died on or After Required Beginning
Date
If the owner died on or after his or her required beginning
date (defined earlier) and you are an eligible designated
beneficiary, you must base your required minimum distributions for years after the year of the owner's death on the
longer of:
• Your single life expectancy shown in Table I in Appendix B, as determined under Beneficiary an individual,
later; or
• The owner's life expectancy as determined under
Death on or after required beginning date under Beneficiary is not an individual, later.
If there is no designated beneficiary use the owner's life
expectancy.
Surviving spouse is sole designated beneficiary. If
the owner died on or after his or her required beginning
date and his or her spouse is the sole designated beneficiary, the life expectancy the spouse must use to figure
his or her required minimum distribution may change in a
future distribution year. This change will apply where the
spouse is older than the deceased owner or the spouse
treats the IRA as his or her own.

Designated beneficiary who is not an eligible designated beneficiary. Distributions to a designated beneficiary who is not an eligible designated beneficiary must be completed within 10 years of the death of the owner. See
10-year rule, later.

 

[scrinch]

In 2022 the IRS released proposed regulations that required non-eligible designated beneficiaries to both take RMDs based on on their life expectancy and to empty the account within 10 years. Since then they have not finalized those regulations and have issued notices effectively relieving this RMD requirement for years 2021, 2022, and 2023. So the current IRS position is that RMDs will be required, but that requirement is not being enforced yet.
https://www.kitces.com/blog/irs-notice-secure-act-required-minimum-distributions-rmd-inherited-ira-beneficiaries-2023-2024/#:~:text=Amid%20this%20backdrop%2C%20the%20IRS,)%20RMDs%20for%202023%2C%20essentially%20'

 

[SecretlyFI]

Thank you so much. That explains the contradictions in what I've been reading. Interestingly, the Vanguard Inherited IRA calculator, which does ask all the relevant questions, gives a result that an RMD is required each year. But I will ignore that for now and pay attention to the proposed regs to see if they get finalized. Thanks and sorry for the hijack, OP.

 

[CRLLS]

Note that pub590-B for the 2023 tax year has not been issued yet. FRom the article you linked:

This information is based on proposed IRS regulations published in February 2022. It is possible they could be subject to change when the regulations are finalized at some point in the future.

The Secure Act 2.0 signed December 29, 2022 has amended some of this information. The IRS issued some info this year basically delaying any penalties for RMD's not taken in 2022 and 2023. I won't go into anything more than that as I am as confused as the next person as to what the IRS WILL do. Enough to say I have yet to find any definitive, and actionable instructions. Until Pub590-B for 2023 is issued, I don't know what to do myself.

 

[cathy63]

Note that pub590-B for the 2023 tax year has not been issued yet. FRom the article you linked:

The Secure Act 2.0 signed December 29, 2022 has amended some of this information. The IRS issued some info this year basically delaying any penalties for RMD's not taken in 2022 and 2023. I won't go into anything more than that as I am as confused as the next person as to what the IRS WILL do. Enough to say I have yet to find any definitive, and actionable instructions. Until Pub590-B for 2023 is issued, I don't know what to do myself.

There can't be a definitive answer until the regs are finalized. Right now they're still in a proposed status. I don't believe they'll be finalized this year, so Pub 590-B for 2023 is unlikely to provide much clarification.