Thoughts on Inherited IRA Withdrawals

[Willers]

This might be helpful for anyone looking at scenarios, either current or future. As always, check with a CPA for accuracy.

https://inherited-rmd-calculator.web.vanguard.com/

 

[FiveDriver]

I'm not trying to make this any more complex than it needs to be. My DW is the sole Beneficiary named on my Traditional & Rollover IRA's at Fidelity. They are currently valued at well over $800K and by the time I shuffle off this mortal coil.....they could be into 7 figures.

I don't want to slice that up over 10 years and pay 32% taxes to my rich uncle.

This is from NerdWallet, and until we can meet with our CPA, this will serve as guidance --

Inherited IRA rules for spouses
If you're the sole beneficiary of your spouse’s IRA, you can take over the account (also known as a spousal transfer or “assuming” the IRA), and the IRS will treat it as though it has been yours all along. This means that you can continue to make contributions to the inherited IRA, and the schedule for required minimum distributions is reset so that it’s based on your own life expectancy.

 

[N02L84ER]

At this point we're still trying to reduce total tax liability over the remaining years. Won't take any this year (unless required by IRS) as my earned income from w*rk pushes our MAGI up. Depending on how things shake out we may just take it all in 2025 to avoid possible ACA cliff return in 2026.

If your inherited IRA was after 2019 and NOT one of the exception cases (spouse, young child, less than 10 year age difference, etc.), you should make a withdrawal this year. According to the Vanguard inherited IRA calculator:
This calculator follows the IRS SECURE Act of 2019 Required Minimum Distribution (RMD) rules and IRS Notice 2023-54.

How could your estimate and possible actions be impacted by these regulations?

• Effective 2024, you must take RMDs each year and deplete the inherited account by the 10th year after the decedent's date of death.

 

[CRLLS]

And just to clarify for other readers, the IRA withdrawn with 100% withholding was done in 2023, right?

To be clear, the tax obligation was due to a rather large qualified dividend not related to any of our IRA's. The one for tax obligation was for tax year 2023, and withheld in 2023. I think that is what you asked about. I am thinking on emptying the remaining amount of the inherited IRA in 2024, this year, before tax year 2025 when our own IRAs begin RMDs.

 

[TickTock]

This might be helpful for anyone looking at scenarios, either current or future. As always, check with a CPA for accuracy.

https://inherited-rmd-calculator.web.vanguard.com/

Thanks for the link!

So I entered the relevant information, and it spit out a non-zero number. But there's no explanation of how it was calculated. I waded through the 13-page
IRS Notice 2023-54 that N02L84ER liked to as best I could and couldn't figure out how to calculate it.

I'm meeting with our CPA in early June.

 

[Willers]

Thanks for the link!

So I entered the relevant information, and it spit out a non-zero number. But there's no explanation of how it was calculated. I waded through the 13-page
IRS Notice 2023-54 that N02L84ER liked to as best I could and couldn't figure out how to calculate it.

I'm meeting with our CPA in early June.

I did a test on mine (as if DM passed last year since no RMD is due this year) and it appeared to match the number that would have been calculated using table I of Publication 590-B.

I'm likely to distribute more early on because I want it gone before it affects my RMD's and DW's ACA premiums since I'll be on Medicare before she will. Remember that, by definition, the RMD means the minimum so you are free a adjust up if that makes sense in any given tax year.

 

[TickTock]

Okay, after wading through 590-B again, using Table 1 I think I now understand the calculation.

 

[yclipse]

I will only mention that, despite the fact that virtually everyone simply assumes that a non-spouse DB should draw the entire balance of the account over a period of ten years, doing the calculations shows that a drawdown within a period of six years will often be preferable. That gives the DB some flexibility in determining when that six years should be implemented.

 

[pb4uski]

I will only mention that, despite the fact that virtually everyone simply assumes that a non-spouse DB should draw the entire balance of the account over a period of ten years, doing the calculations shows that a drawdown within a period of six years will often be preferable. That gives the DB some flexibility in determining when that six years should be implemented.

You can't just say that without providing any explanation or support or citations as to why 6 years is "preferable" and expect us all to believe it. Care to explain why you think that?

 

[yclipse]

Sure. I posted it more than a year ago - U.P. Family Succession Planning: IRA distributions under SECURE

 

[pb4uski]

Sure. I posted it more than a year ago - U.P. Family Succession Planning: IRA distributions under SECURE

Read the article. It's poppycock. Doesn't give a good reason at all. It just says:

...The primary benefit of using the alternative six-year period is that the funds that remain after taxes are paid are in the hands of the beneficiary several years sooner. ...

If that is the case then why not take all out at once... that gets the funds after taxes into the hands of the beneficiary as soon as possible, so that should be best... right?

Actually, using their example you would want to withdraw as much as possible at the assumed 26% tax rate (22% federal + 4% state).

But then they say:

... Tax is paid on the distributions, at the Federal marginal rate of 22% in most cases, but then the remaining assets are held outside of the IRA container, and they can continue to appreciate, no longer subject to income tax.

Presumably the assets held "outside of the IRA container" are taxable account assets because they can't be tax-deferred accounts or tax-free accounts. Those assets would be subject to income tax unless it was non-dividend paying stocks that were never sold and received a stepped up basis when the owner passes.

 

[Exchme]

Read the article. It's poppycock. Doesn't give a good reason at all. It just says:


If that is the case then why not take all out at once... that gets the funds after taxes into the hands of the beneficiary as soon as possible, so that should be best... right?

Actually, using their example you would want to withdraw as much as possible at the assumed 26% tax rate (22% federal + 4% state).

But then they say:

Presumably the assets held "outside of the IRA container" are taxable account assets because they can't be tax-deferred accounts or tax-free accounts. Those assets would be subject to income tax unless it was non-dividend paying stocks that were never sold and received a stepped up basis when the owner passes.

+1
Weirdly, though the linked article assumes a constant growth rate, it didn't take constant withdrawals each year in either the 10 year or 6 year case, they vary all over. So their example wasn't even carefully constructed.

Absent other considerations, the math will favor minimizing tax drag by keeping the money in the tax protected account as long as possible without increasing the subsequent tax bracket.

There can of course be lots of other considerations that might drive the decision toward faster withdrawals, like future IRMAA tiers to dodge or needing to draw cash from some tax deferred account in order to live or avoiding selling highly appreciated assets prior to claiming SS or a pension. If I were trying to advertise a planning service like they were, I would mention all kinds of situations, but on those potentially important issues, the article is silent.

 

[perinova]

Reading upon then rules, it is _important_ for a spouse NOT to open an inherited IRA but instead roll over the deceased's IRA into his/her own.
This avoids the 10 year rule and this applies to Roth IRAs as well.

 

[gauss]

The language is a little convoluted, but it does appear that a surviving spouse IS an "Eligible Designated Beneficiary" and can roll an Inherited IRA into her own separate IRA Account. She can then take out RMD's based on her Life Expectancy tables.

This appears to avoid the 10 Year Rule on required withdrawals. Which is what I was trying to do.

Yes -- My understanding is that a surviving spouse can elect to treat the inherited IRA (from the deceased spouse) as their own.

I believe the IRA company will change the name to your name -- and any further distributions will be code 7 in box 7, not code 4. It would NOT be titled as an inherited IRA (if that is what the spouse desires).

The key is that it is no longer treated as an inherited IRA -- but rather as their own.

Reading upon then rules, it is _important_ for a spouse NOT to open an inherited IRA but instead roll over the deceased's IRA into his/her own.
This avoids the 10 year rule and this applies to Roth IRAs as well.

yes!

------
OP - You really should look into the scenario of doing Roth conversions now while you are still married filing jointly. As you suspect, the surviving spouse will likely be in a higher tax bracket - perhaps significantly if they later file Single. The way that Social Security is taxed further aggravates this situation (effectively near doubles the marginal tax rate for a range of income until 85% of SS is taxed.)

I am planning to convert all of our IRAs except for a few hundred thousand to be targeted for QCDs (tax free charity donations while living) and/or tax free distributions to charities upon both of our deaths (via charity beneficiary on the surviving spouses IRA).


-gauss

 

[FiveDriver]

Gauss and Perinova --

Yes. Speaking strictly for myself, I was misusing the term 'Inherited' within the IRA context. When a Spouse is Sole Beneficiary.....the IRA is 'Assumed' into Spouse's Account -- not Inherited. The RMD's are based on the Spouse's Life Expectancy tables.

Roth Conversions were always difficult for us. Self-Employment Income was never defined for certain by Dec 31st. And then we did the ACA Balancing Act for the last few years. Now things have stabilized somewhat.

I just might try to 'guesstimate' our Income for TY2024 next December.

If only there was an online calculator for Roth Conversions that used previos Tax Year numbers.......

 

[OldShooter]

I believe that's incorrect. RMDs have never been required on inherited Roth IRAs AFAIK. IRS Pub 590-B would be the place to look.

I inherited my mom's tIRA maybe 10-15 years ago and was required to take annual RMDs. IIRC this ten year thing is relatively new.

 

[SecondCor521]

I inherited my mom's tIRA maybe 10-15 years ago and was required to take annual RMDs. IIRC this ten year thing is relatively new.

In the sentence of mine you quoted, note the word "Roth". The RMD rules differ based on lots of factors including whether it is a traditional IRA or a Roth IRA, and also when you inherited it.

You're right - the 10 year thing started in either 2020 or 2021. IIRC it was part of the first SECURE Act.

 

[RobLJ]

Thank you Sir. I'm going to take this as an answer to my original question about easing the tax bite on my Traditional & Rollover IRA. My DW is named as the sole Beneficiary. She will have instructions to transfer these into her own IRA, as an Eligible Designated Beneficiary. She can take RMD's per her Life Expectancy table when she reaches 73. (She's younger than I am.)

The sidebar discussion about Roth IRA's does not apply to my situation.

I'm trying to (slowly) do a book for DW (or our sons) on what to do after one or both of us dies. We just had a Nevada will made to replace our Texas will and the question of what happens to my 403b from Texas State Employers and whether it was different from IRA rules has been on my to-do list. Right now nmy 403b and DW's IRAs have each other as primary beneficiaries and the 2 DS as secondary.



From the IRA rule sheet someone linked, in
term of spouses:
"
Death of the account holder occurred in 2020 or later

Spousal beneficiary options

If the account holder's death occurred prior to the required beginning date, the spouse beneficiary may:

• Keep as an inherited account
  • Delay beginning distributions until the employee would have turned 72
  • Take distributions based on their own life expectancy
  • Follow the 10-year rule
• Roll over the account into their own IRA

If the account holder's death occurred after the required beginning date, the spouse beneficiary may:

• Keep as an inherited account
  • Take distributions based on their own life expectancy, or
• Rollover the account into their own IRA"

I can cross off one of my to-do items, based on the thread. Of course, this may change.

 

[FiveDriver]

I'm trying to (slowly) do a book for DW (or our sons) on what to do after one or both of us dies. We just had a Nevada will made to replace our Texas will and the question of what happens to my 403b from Texas State Employers and whether it was different from IRA rules has been on my to-do list. Right now nmy 403b and DW's IRAs have each other as primary beneficiaries and the 2 DS as secondary.



From the IRA rule sheet someone linked, in
term of spouses:
"
Death of the account holder occurred in 2020 or later

Spousal beneficiary options

If the account holder's death occurred prior to the required beginning date, the spouse beneficiary may:

• Keep as an inherited account
  • Delay beginning distributions until the employee would have turned 72
  • Take distributions based on their own life expectancy
  • Follow the 10-year rule
• Roll over the account into their own IRA

If the account holder's death occurred after the required beginning date, the spouse beneficiary may:

• Keep as an inherited account
  • Take distributions based on their own life expectancy, or
• Rollover the account into their own IRA"

I can cross off one of my to-do items, based on the thread. Of course, this may change.

Yeah, I'm putting all of this info in a Binder of instructions. I've got the Life Insurance, with phone numbers and details in there. The list of accounts outside of Fidelity (Navy Fed, Capital One, et al), and the approx value of my guitars and amp. And my Coin Collection, along with a trusted local coin dealer.

Let's hope we never have to open that binder for a long time.

This thread alone has likely saved thousands of dollars with proper claiming strategy.

 

[StillFiguringItOut]

Does anyone know if one can make a qualified charitable distribution from an inherited IRA? If yes, must the inheritor be older than 70.5?

 

[gauss]

Fidelity seems to indicate yes -- allowed for inherited iras, but still must be age 70.5.

https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds

Can I make a QCD?
While many IRAs are eligible for QCDs—Traditional, Rollover, Inherited, SEP (inactive plans only), and SIMPLE (inactive plans only)* —there are requirements:

You must be 70½ or older to be eligible to make a QCD.

 

[Dtail]

Fidelity seems to indicate yes -- allowed for inherited iras, but still must be age 70.5.

https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/qcds

Interesting. I wonder if it will be adjusted to 75 y.o eventually?

 

[OldShooter]

Interesting. I wonder if it will be adjusted to 75 y.o eventually?

My guess is no. The incredible confusion about how RMDs and QCDs relate is IMO silly. They are completely unrelated except for the unfortunate fact that the beginning dates for the two were for a time the same. The dates are no longer the same. Never say never in the world of politics but I see no reason that they will be made the same in the future. The 401(c)3 lobby, for one, will fight it with everything they've got.

 

[WWDog]

This whole discussion had me quite worried at first. Then when I parsed out that there were really two situations being talked about, I stopped worrying. I have a roth and it all goes to my wife and then the kids if she is already gone. She would not be taxed if I go. The kids have 10 years of tax free interest on the Roth along with the original Roth amount not being taxed. If I have misunderstood this, please let me know.

 

[imnontrad]

Your spouse inherits your IRAs WITHOUT a 10 year obligation to empty the account. Others who avoid that 10 year rule is someone who is less than 10 years younger than the original owner, including those who are older (siblings/parents), plus their minor children.
However, if your spouse dies before the account is emptied, the next people who inherit it have the 10 year rule - and based on your death date.
Another thing to consider besides taxes is if the money is after the year they turn 63, it may result in a total income high enough to trigger a Medicare premium surcharge (IRMAA).