Inherited IRA

[ProGolferWannabe]

My DW’s mother passed away in early January 2021. DW was one of the beneficiaries of her mother’s tIRA and received 1/3 of the proceeds that were rolled into an inherited IRA. Her mother had not taken her RMD in 2021.

A couple of questions

(1) As my mother in law was alive for a week or so in 2021, she will (I assume), need to have a final federal tax return prepared for 2021. As mentioned above, she had not take her RMD. Since she died before she did so, is there a requirement that one be taken and reported on her final 1040? Or should her RMD be taken and 1/3 of that amount be reported on DW’s 1040 for 2021?

(2) After the 2021 issue gets resolved, I understand that DW has to “liquidate” the inherited IRA in 10 years. Can she wait to do it all at once after 10 years or does she have to do 10% per year?

(3) If I am missing anything else, please feel free to share.

Thanks.

 

[38Chevy454]

Someone can clarify if I am wrong, but here are my answers:


1) I believe it does not matter, as long as either mother or the inherited recipients take the RMD. Given the mother's early passing, it is probably tax-wise smart to have it done under mother's final tax return, as opposed to the RMD value on your wife's income. Some entity has to take the RMD for 2021.

2) My understanding is you can do it any way you want, as long as it is all withdrawn by the 10 year timeframe. So you can wait if you want and take it all at the end. Just beware of the tax hit for that lump sum type distribution.

3) Someone will have to file a tax return for the mother for 2021. The estate executor file as representative for the decedent.

 

[disneysteve]

I believe 38Chevy454 is correct on all 3 points.

 

[ProGolferWannabe]

Someone can clarify if I am wrong, but here are my answers:


1) I believe it does not matter, as long as either mother or the inherited recipients take the RMD. Given the mother's early passing, it is probably tax-wise smart to have it done under mother's final tax return, as opposed to the RMD value on your wife's income. Some entity has to take the RMD for 2021.

2) My understanding is you can do it any way you want, as long as it is all withdrawn by the 10 year timeframe. So you can wait if you want and take it all at the end. Just beware of the tax hit for that lump sum type distribution.

3) Someone will have to file a tax return for the mother for 2021. The estate executor file as representative for the decedent.

Thank you....You may very well be correct, but the one concern I had was if my wife could conduct a financial transaction after her mother’s death and effectively treat it as a taxable event for her mother. Just seems like to that might be a problem as far as the IRS concerned.

 

[ERD50]

Thank you....You may very well be correct, but the one concern I had was if my wife could conduct a financial transaction after her mother’s death and effectively treat it as a taxable event for her mother. Just seems like to that might be a problem as far as the IRS concerned.

I agree. I may be wrong, but I don't think you can take the RMD as her after she is deceased.

When my MIL went into hospice care early in 2019, I went ahead and processed her RMD for her, just so none of the beneficiaries would need to deal with it in that tax year. Not a big deal either way, just one less thing for the three beneficiaries to do, versus me doing for MIL one time, with a few clicks, with her approval.

-ERD50

 

[cathy63]

Thank you....You may very well be correct, but the one concern I had was if my wife could conduct a financial transaction after her mother’s death and effectively treat it as a taxable event for her mother. Just seems like to that might be a problem as far as the IRS concerned.

This article has some answers for you.

https://thelink.ascensus.com/articles/2019/12/18/how-to-handle-year-of-death-rmds

When an account owner dies before satisfying a required minimum distribution (RMD) for the year, the beneficiaries must distribute the remaining RMD amount by December 31 of the year of death. If there are multiple beneficiaries, each beneficiary is responsible for removing their proportional share of the total RMD amount in the year of death; one beneficiary cannot satisfy the entire RMD amount.

For example, if there are four beneficiaries sharing equally in an IRA, each beneficiary inherits 25 percent of the IRA. If the RMD amount is $800, each beneficiary would be responsible for 25 percent of the RMD, $200 in this case. Even if one beneficiary takes $800, the other three are still responsible for taking $200.

and

Why wouldn’t we report the year-of-death RMD to the IRA owner since it is the IRA owner’s RMD?

When an IRA owner dies, his designated beneficiary or beneficiaries are entitled to the remaining IRA balance. You may not knowingly pay, or report a distribution as paid, to an individual who is deceased. You must report it as payable to the actual recipient of the distribution, the beneficiary. According to the Instructions for Forms 1099R and 5498, “If you make a distribution to a beneficiary, trust, or estate, prepare Form 1099-R using the name and TIN of the beneficiary, trust, or estate, not that of the decedent.”

 

[RetireeRobert]

My DW’s mother passed away in early January 2021. DW was one of the beneficiaries of her mother’s tIRA and received 1/3 of the proceeds that were rolled into an inherited IRA. Her mother had not taken her RMD in 2021.

A couple of questions


(2) After the 2021 issue gets resolved, I understand that DW has to “liquidate” the inherited IRA in 10 years. Can she wait to do it all at once after 10 years or does she have to do 10% per year?


Thanks.

As to your question 2, I do not think it would be wise to wait to year 10 to take the entire amount out at that time. The tax hit in that year would be tremendous. I would spread the tax hit out over several years, perhaps start withdrawals in year 5, thus allowing 5 more years of tax sheltered growth, then start withdrawing the balance over the next 5 years. or something like that to balance tax-deferred growth while lessening the tax hit in any one year.

 

[teejayevans]

As to your question 2, I do not think it would be wise to wait to year 10 to take the entire amount out at that time. The tax hit in that year would be tremendous. I would spread the tax hit out over several years, perhaps start withdrawals in year 5, thus allowing 5 more years of tax sheltered growth, then start withdrawing the balance over the next 5 years. or something like that to balance tax-deferred growth while lessening the tax hit in any one year.

Depending on size of IRA and beneficiary other income sources you might want to pull it out this year. Current administration has already said they’re raising taxes. Or you can postpone SS if in the 62-69 age range, empty IRA before taking SS.
There’s just too many variables to give generic advice.

 

[ProGolferWannabe]

Depending on size of IRA and beneficiary other income sources you might want to pull it out this year. Current administration has already said they’re raising taxes. Or you can postpone SS if in the 62-69 age range, empty IRA before taking SS.
There’s just too many variables to give generic advice.

The amount in question is about $150,000 but we will actually be 69 and 68 in 2031 (the year we have to empty the account), so using that as a bridge to help defer social security seems like an incredibly smart idea. Thank you.

 

[Dd852]

My mother died in February without having taken her rmd. When the ira was split 50/50 between my sister and myself the custodian deposited my half share of the rmd in cash into my checking account before rolling the rest into an inherited ira. In other words my sister and I had to take the rmd onto our taxes; once she passed nothing more could be done under my mother’s name.

 

[Bamaman]

You've received good advice. Time is often of the essence in dealing with estates. I would be looking to disperse funds as soon as possible if the estate doesn't have to be probated.

My father had no real estate, and I as executor was on his checking/savings accounts. We didn't have to probate his estate. And we moved quick in January to avoid setting up an estate with the IRS. Income taxes on estates were higher than his tax as an individual.

 

[SecondCor521]

My DW’s mother passed away in early January 2021. DW was one of the beneficiaries of her mother’s tIRA and received 1/3 of the proceeds that were rolled into an inherited IRA. Her mother had not taken her RMD in 2021.

A couple of questions

(1) As my mother in law was alive for a week or so in 2021, she will (I assume), need to have a final federal tax return prepared for 2021. As mentioned above, she had not take her RMD. Since she died before she did so, is there a requirement that one be taken and reported on her final 1040? Or should her RMD be taken and 1/3 of that amount be reported on DW’s 1040 for 2021?

(2) After the 2021 issue gets resolved, I understand that DW has to “liquidate” the inherited IRA in 10 years. Can she wait to do it all at once after 10 years or does she have to do 10% per year?

(3) If I am missing anything else, please feel free to share.

Thanks.

1. Maybe, maybe not. Regardless of the fact that she died, she is only required to file if she meets one of the requirements listed in the Form 1040 instructions under "Who must file". If she died only a week or so into the new year, it is possible that her income is low enough that she does not need to file.

That being said, it's probably a good idea to file a return anyway so that you can reflect on her 2021 return that she is deceased. If she is due a refund, there is a special form that someone will have to fill out to claim that refund. It's not difficult.

Your DW and the other beneficiaries generally must take your DMIL's RMD for 2021 and must do so by 12/31/2021. The amount is calculated based on DMIL's information as though she were alive - DMIL's traditional IRA balance as of 12/31/2020 divided by DMIL's divisor which would generally be based on DMILs age as of 12/31/2020. There is no proration or anything just because she passed away early in the year.

Despite the article that cathy63 quoted, I don't think there is any IRS requirement of proportionality. I tried to find something definitive in Pub 590-B but could not. This article seems to state that you can do it in any way you like as long as the beneficiaries collectively take out the RMD amount (or more):

https://www.morningstar.com/articles/948333/multiple-beneficiaries-and-the-year-of-death-rmd

If you don't have to do it proportionally, then it might make more sense for the beneficiaries with the lowest marginal rate to take more of the RMD if they're willing to do so.

Your DW would report whatever portion of the RMD that she takes on your DWs (and presumably your) tax return for 2021.

2. Assuming your DW was more than 10 years younger than your DMIL and doesn't meet any of the other narrow exceptions to the 10 year rule in the SECURE Act, your DW must completely drain the inherited IRA by the end of the year which contains the tenth anniversary of death, which would be 12/31/2021. Lots of articles say "10 years" but that's not technically correct.
In your case it's almost 11 years because of the timing. Vanguard's article here indicates the proper period: https://investor.vanguard.com/inherit/ira-rmd

You are correct in that your DW can, other than the 2021 RMD mentioned above, withdraw any amounts over the subsequent ~11 year period. You'll have to balance tax-free growth vs. leveling your taxable income as someone else pointed out, along with the rest of your tax situation.

3. Your wife should add beneficiary designations on her inherited IRA.

You've received good advice. Time is often of the essence in dealing with estates. I would be looking to disperse funds as soon as possible if the estate doesn't have to be probated.

My father had no real estate, and I as executor was on his checking/savings accounts. We didn't have to probate his estate. And we moved quick in January to avoid setting up an estate with the IRS. Income taxes on estates were higher than his tax as an individual.

The above is true, but the traditional IRA is tax deferred, so there is no need to hurry with that (although there is a deadline for getting the account separated, but it sounds like that has already happened) because, other than the RMD itself, there is no tax consequence to either deceased DMIL or the DW.

Any taxable accounts that are income-bearing it would be smart to get those distributed before they accumulate more than $600 in income (which IIRC is the exemption amount for an estate, so any estate with less than that amount in income does not require an estate tax return).

 

[ProGolferWannabe]

2. Assuming your DW was more than 10 years younger than your DMIL and doesn't meet any of the other narrow exceptions to the 10 year rule in the SECURE Act, your DW must completely drain the inherited IRA by the end of the year which contains the tenth anniversary of death, which would be 12/31/2021. Lots of articles say "10 years" but that's not technically correct.
In your case it's almost 11 years because of the timing. Vanguard's article here indicates the proper period: https://investor.vanguard.com/inherit/ira-rmd

Thank you for all of the information....especially this. I was not aware.

 

[PoorOldCountryBoy]

My DW’s mother passed away in early January 2021. DW was one of the beneficiaries of her mother’s tIRA and received 1/3 of the proceeds that were rolled into an inherited IRA. Her mother had not taken her RMD in 2021.

A couple of questions

(1) As my mother in law was alive for a week or so in 2021, she will (I assume), need to have a final federal tax return prepared for 2021. As mentioned above, she had not take her RMD. Since she died before she did so, is there a requirement that one be taken and reported on her final 1040? Or should her RMD be taken and 1/3 of that amount be reported on DW’s 1040 for 2021?

(2) After the 2021 issue gets resolved, I understand that DW has to “liquidate” the inherited IRA in 10 years. Can she wait to do it all at once after 10 years or does she have to do 10% per year?

(3) If I am missing anything else, please feel free to share.

Thanks.

Google "IRS inherited IRA", there is accurate and understandable information clearly presented there that answers your questions.