|
02-03-2021, 02:39 PM
|
#1
|
Recycles dryer sheets
Join Date: Jan 2012
Posts: 141
|
Inherited IRA Question
I received what I thought was incorrect tax information regarding an inherited IRA. I plan on confirming this with a tax pro, but figured I would ask here and see if folks believe I am correct in my thinking.
Scenario:
Person A dies in early January 2021 and leaves the balance of a traditional IRA to Children B, C, and D. Each child gets 1/3 of the balance.
Person A did not take an RMD in 2021 and was required to do so.
WHAT I UNDERSTOOD TO BE TRUE: Children B, C, and D are required to take 1/3 of Person A's RMD (based upon Person A's life expectancy in 2021 per the IRS), and those distributions would be treated as taxable income (all contributions were pre-tax) on each of the children's respective 2021 tax returns.
WHAT I WAS TOLD: Children B, C, and D are required to take 1/3 of Person A's RMD (based upon Person A's life expectancy in 2021 per the IRS), and those distributions would be treated as taxable income (all contributions were pre-tax) on the final tax return of Person A for 2021.
Basically, it is a question of on what return the taxes are reported....the Parent's or the Children's.
As always, thanks.
|
|
|
|
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!
Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!
You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!
|
02-03-2021, 02:47 PM
|
#2
|
Recycles dryer sheets
Join Date: Jan 2014
Location: Voorheesville, NY
Posts: 203
|
I ran into this with my father-in-law. My wife and her sisters arranged to have HIS RMD taken before the year, in which he died, ended. It was reported on HIS final tax return and then they started their inherited RMDs in the following year.
|
|
|
02-03-2021, 02:49 PM
|
#3
|
Thinks s/he gets paid by the post
Join Date: Aug 2017
Posts: 2,050
|
I will let someone else answer your question who has the experience to back it up (or time to check as I am heading out the door) but I believe neither of those is complete and correct. I think the inherited RMD rules are all changed due to the Secure Act.
|
|
|
02-03-2021, 02:58 PM
|
#4
|
Thinks s/he gets paid by the post
Join Date: Jul 2009
Location: The Beautiful Blue Ridge Mountains
Posts: 2,781
|
Everything changed in 2019 so be careful. I inherited before then and had to take Dad’s RMD first, but I can’t find that rule anymore. Maybe the new 10 year rule did away with that? Dunno.
See IRS pub 590-B.
|
|
|
02-03-2021, 05:51 PM
|
#5
|
Thinks s/he gets paid by the post
Join Date: Dec 2018
Location: DuPage County IL
Posts: 2,702
|
Quote:
Originally Posted by ProGolferWannabe
I received what I thought was incorrect tax information regarding an inherited IRA. I plan on confirming this with a tax pro, but figured I would ask here and see if folks believe I am correct in my thinking.
Scenario:
Person A dies in early January 2021 and leaves the balance of a traditional IRA to Children B, C, and D. Each child gets 1/3 of the balance.
Person A did not take an RMD in 2021 and was required to do so.
WHAT I UNDERSTOOD TO BE TRUE: Children B, C, and D are required to take 1/3 of Person A's RMD (based upon Person A's life expectancy in 2021 per the IRS), and those distributions would be treated as taxable income (all contributions were pre-tax) on each of the children's respective 2021 tax returns.
WHAT I WAS TOLD: Children B, C, and D are required to take 1/3 of Person A's RMD (based upon Person A's life expectancy in 2021 per the IRS), and those distributions would be treated as taxable income (all contributions were pre-tax) on the final tax return of Person A for 2021.
Basically, it is a question of on what return the taxes are reported....the Parent's or the Children's.
As always, thanks.
|
all i can offer is our experience. my wife inherited a TIRA from her brother back in '03 (he was 56). she was his sister so this is a non-spousal IRA with annual RMDs. when we set this up the brokerage (American Century) determined the RMD based on HER age at the time of HIS death. the RMD IS taxable but as I know the original basis I fill out form 8606 each year to determine the correct taxable amount. we set the RMD to occur every January.
__________________
Rich
Ham Radio, Sport Pilot, RVer
FIRE: 8/11/2005, age 55y,1d
Dispatcher, then shift supv, then administrator for a regional 9-1-1 call center
|
|
|
02-03-2021, 05:54 PM
|
#6
|
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2006
Location: Boise
Posts: 7,865
|
Because person A was required to take an RMD in 2021, then that RMD must be taken in 2021.
The RMD amount would be calculated based on A's divisor in the lookup table and their 12/31/2020 traditional IRA balance(s) - as if A had continued living.
Since person A died before they took any of their RMD, between the three of them the children must take the RMD before the end of 2021. They would report that RMD on their tax return on their 2021 Form 1040 lines 4a and 4b (or equivalent lines).
(If person A had taken part of their RMD before they had died, then the three children would have to take whatever had not been taken yet by A.)
It is not required that the three children each take 1/3 of the RMD amount. For example, one of the children could take 1/2 of the RMD and the other two could each take 1/4 of the RMD. This may be useful if the children are in different tax brackets.
The 2021 RMD must be taken by 12/31/2021. If not, a penalty equal to 50% of the amount that should have been taken but was not would be assessed.
That takes care of the RMD. Now B, C, and D have inherited IRAs.
Since A died in January 2021, the SECURE Act rules apply. Assuming B, C, and D don't qualify for any of the exceptions (under 18, within 10 years of A's age, disabled, etc.), then they must drain the account by the end of the year which contains the 10th anniversary of the date of death, so by 12/31/2031. They do not have to follow any RMD calculations and can take as little or as much each year between now and 12/31/2031.
(rk911's experience is pre-SECURE Act, so the rules are different for him and his wife.)
Any withdrawals during that 11 year time frame would again be reported on their tax returns on line 4a/4b.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
|
|
|
02-03-2021, 06:02 PM
|
#7
|
Recycles dryer sheets
Join Date: Jan 2012
Posts: 141
|
Quote:
Originally Posted by SecondCor521
Because person A was required to take an RMD in 2021, then that RMD must be taken in 2021.
The RMD amount would be calculated based on A's divisor in the lookup table and their 12/31/2020 traditional IRA balance(s) - as if A had continued living.
Since person A died before they took any of their RMD, between the three of them the children must take the RMD before the end of 2021. They would report that RMD on their tax return on their 2021 Form 1040 lines 4a and 4b (or equivalent lines).
(If person A had taken part of their RMD before they had died, then the three children would have to take whatever had not been taken yet by A.)
It is not required that the three children each take 1/3 of the RMD amount. For example, one of the children could take 1/2 of the RMD and the other two could each take 1/4 of the RMD. This may be useful if the children are in different tax brackets.
The 2021 RMD must be taken by 12/31/2021. If not, a penalty equal to 50% of the amount that should have been taken but was not would be assessed.
That takes care of the RMD. Now B, C, and D have inherited IRAs.
Since A died in January 2021, the SECURE Act rules apply. Assuming B, C, and D don't qualify for any of the exceptions (under 18, within 10 years of A's age, disabled, etc.), then they must drain the account by the end of the year which contains the 10th anniversary of the date of death, so by 12/31/2031. They do not have to follow any RMD calculations and can take as little or as much each year between now and 12/31/2031.
(rk911's experience is pre-SECURE Act, so the rules are different for him and his wife.)
Any withdrawals during that 11 year time frame would again be reported on their tax returns on line 4a/4b.
|
This is basically what I thought, though you stated it more clearly and accurately that what I did. Thank you.
|
|
|
|
Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
|
|
Thread Tools |
|
Display Modes |
Linear Mode
|
Posting Rules
|
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts
HTML code is Off
|
|
|
|
» Recent Threads
|
|
|
|
|
|
|
|
|
|
|
|
|
» Quick Links
|
|
|