Inherited IRA RMDs-Secure Act 2.0 and the IRS

[Dtail]

Different RMD question.
Theoretically if the life expectancy tables aren't changed, then for those who start RMD's at 75 y.o., would for example the required percentage takeout for age 76 be the same percentage as required for age 76 currently?

 

[imbatman]

I will say one other minor weird thing I noticed, being someone who hasn't had to deal with RMDs before this.........my YE balance on my broker statement is always a little LESS than the FMV reported to IRS (in 5498, that your broker also sends to you) for calculating RMD. I suspect it is accrued but unpaid dividends / interest that are always floating around at YE.

Anyhow, make sure to use your 5498 amount.

BTW here are the 2022 IRS tables in 590b that @cathy63 has helpfully referenced: https://www.irs.gov/publications/p590b#en_US_2022_publink100090444

 

[audreyh1]

Different RMD question.
Theoretically if the life expectancy tables aren't changed, then for those who start RMD's at 75 y.o., would for example the required percentage takeout for age 76 be the same percentage as required for age 76 currently?

Yes, that’s my understanding. Everyone uses the same table and it’s all based on current year birthday age.

 

[audreyh1]

I will say one other minor weird thing I noticed, being someone who hasn't had to deal with RMDs before this.........my YE balance on my broker statement is always a little LESS than the FMV reported to IRS (in 5498, that your broker also sends to you) for calculating RMD. I suspect it is accrued but unpaid dividends / interest that are always floating around at YE.

Anyhow, make sure to use your 5498 amount.

BTW here are the 2022 IRS tables in 590b that @cathy63 has helpfully referenced: https://www.irs.gov/publications/p590b#en_US_2022_publink100090444

Good point. Those year end dividends or increases - should show up by Jan 15th or 20th. Simpler IRA holdings will make it even faster. Foreign tax credit can be a bit of a culprit here. I track in Quicken so can get the updated Dec 31 amount. I guess the 5498 comes out in Jan anyway.

Regardless I plan to take a bit extra not cut it close.

 

[Dd852]

eaxactly this method....

I'm thinking most people would be well served by taking out 10-12% of an inherited tIRA each year until it is depleted in year 10.

.

My mother died in 2021. She left a significant IRA (significant to me) and I simply decided to withdraw monthly over the 10 year period. I input the 1/1 value and then calculated 1/10 of that for the 2022 annual amount that I then divided evenly over the year, 1/9 of the 1/1/2023 amount for this year's withdrawal, 1/8 of the 1/1/2024 amount etc. I obviously can do mid-year corrections if the market swings one way or the other and I want to continue to smooth out. Yes, I potentially lose out on some market moves, but it keeps it simple and gives me a nice, predictable income stream. Given my age, this will run out just about when I have to start my own 401K withdrawals....

 

[CRLLS]

Please allow me to update this thread after a bit of delay. This inherited IRA is DW's. I have been trying to figure if she has to take an RMD this year and if so, what then. To restate in DW's situation: DW is a non-eligible designated beneficiary and MIL passed post RBD and post 1/1/2020.

Since I manage the family's finances, and DW's investments, she seldom checks her Fidelity accounts. Today, I asked her to check her Fido online account. Lo and behold, Fido says she is required to take an RMD this year. (next few weeks). Right or wrong, this is what they say. It also says that she "may" be penalized up to 25% of the RMD amount not taken on time. I think we all know that last part is not applicable.

I am seriously considering closing that inherited account and taking the hit on taxes. Next year, we will both turn 73 and be required to take our own RMD's. We might as well just bite the bullet now on the inherited account and be done with all its complexity and confusion over the next 8 years. Comments?

 

[pb4uski]

I think that the need for RMD is correct. I will be inheriting a traditional IRA from DM and she was 93 so taking RMDs and my understanding is that 1) I have to take RMDs based on the begining of year balance and my age and 2) I have to drain the inherited IRA within 10 years.

 

[GrayHare]

An inherited IRA doesn't seem very complex to manage if Fido figures the RMD. Just take whatever amount they say. The tax torpedo is a separate matter.

 

[statsman]

I am seriously considering closing that inherited account and taking the hit on taxes. Next year, we will both turn 73 and be required to take our own RMD's. We might as well just bite the bullet now on the inherited account and be done with all its complexity and confusion over the next 8 years. Comments?

Does taking the entire amount put you into another tax bracket for this year? If so, I probably would take as much as I could while staying in the current tax bracket (assumes the inherited IRA's RMD has been figured in). Rinse and repeat on successive tax years. That should close out the inherited IRA quickly, unless it's a sizable inherited IRA. One plus I see by keeping the inherited IRA around is it gives you one more avenue with which to have taxes withheld, if you so choose to go that route.

 

[Andre1969]

I try to pay attention to the outcome as I expect someday I might inherit a small IRA. . . Right now my tentative thought is to take 12%* is a year but since it is all hypothetical IDK. Hopefully they will have clear guidance by then if I should happen to be in that situation. (*yes probably not the right math)

If you want to deplete it more or less, evenly each year, you'll have to divide the remaining balance by the number of years left each time.

So for year 1, it would be 10% (1/10)
For year 2, it would be roughly 11.1% (1/9)

By year 5, you'd be up to 20% (1/5)
On year 9, you'd be at 50% (1/2). Sounds like a huge amount, but the bulk of it should have been withdrawn by now.
And finally, year 10 would be 100%.

 

[SecondCor521]

If you want to deplete it more or less, evenly each year, you'll have to divide the remaining balance by the number of years left each time.

So for year 1, it would be 10% (1/10)
For year 2, it would be roughly 11.1% (1/9)

By year 5, you'd be up to 20% (1/5)
On year 9, you'd be at 50% (1/2). Sounds like a huge amount, but the bulk of it should have been withdrawn by now.
And finally, year 10 would be 100%.

I haven't dealt with this but I expect to. I tentatively started with the above idea but have made three changes which I think are improvements:

1. I expect the account to grow over the 10 year period. That growth also needs to be pulled out in the SECURE window. So I use the PMT function in Excel using the expected investment return as the interest rate.

2. Tax brackets grow over time by the rate of inflation. So I subtract my expected rate of inflation from my expected investment return when using an interest rate in the PMT function.

3. Depending on the timing of things, one might have 11 tax years to make withdrawals within the 10 year SECURE window. So I might use 11 instead of 10 in the PMT function.

I also agree that it is good to look ahead over the 10 year period and take into account any significant tax changes, like starting SS or RMDs.

 

[njhowie]

I have been mentally strategizing how to do the withdrawals for me/sis, as we have 10 years from now to withdraw the accounts down to zero.

Today, going through the recurring transfer options on the IRAs I noticed that Fidelity has an option for 10-year drawdown. I may turn this on for the first withdrawal to see how much it takes. If it looks good, I'll just leave it on auto-pilot and not have to worry about it.

Frequency options allow for monthly or annually.

 

[pb4uski]

I'm guessing that it withdraws 1/10th the first year, 1/9th the second year, etc. In other words the balance divided by the years remaining.

Which seems a good, logical approach to me.

 

[njhowie]

I'm guessing that it withdraws 1/10th the first year, 1/9th the second year, etc. In other words the balance divided by the years remaining.

Which seems a good, logical approach to me.

That is how I was planning to manually do it anyhow.

We'll see.

 

[SecondCor521]

That is how I was planning to manually do it anyhow.

We'll see.

I agree.

Although I think one can get a tiny bit fancier in a couple of ways:

1. You can adjust for the fact that the remaining balance will earn returns.

2. You can adjust for the fact that tax brackets are adjusted upwards for inflation.

My plan is to use the result of Excels' PMT(<real rate of return>, 10, <account balance>, 0, 0).

Although if Fidelity just takes the remaining balance and divides it monthly by the number of remaining months, that would be fairly close to the above.

Now that I write that, I think I'll adjust my formula to calculate a monthly amount. Something like PMT(<real rate of return> / 12, 10*12, <account balance>, 0, 0).

(ETA: Yes, I know I should do the whole 12th root thing, but that's probably a rounding error.)