PSA: Inherited IRA and RMD

[SecondCor521]

Quote:

Originally Posted by disneysteve Am I the only one concerned that a major financial institution like that isn't familiar with the withdrawal rules? A simple Google search would turn them up in seconds.

Probably one front line CSR wasn't familiar with the exceptions. I'm sure someone at Morgan Stanley knows about them.

[marko]

[QUOTE

He's exempt from the 10 year rule because he's disabled. (Assuming that's true of your brother - I think he needs to be fully and permanently disabled, but check the rules on that.)[/QUOTE]

Hes fully and permanently disabled. But what exactly is he exempt from then? The 10 year rule says he must start in year 1 regardless of age but if he's exempt what is he exempt from?

[disneysteve]

Quote:

Originally Posted by SecondCor521 Probably one front line CSR wasn't familiar with the exceptions. I'm sure someone at Morgan Stanley knows about them.

Good point. I hope that’s the case.

[disneysteve]

Quote:

Originally Posted by marko Hes fully and permanently disabled. But what exactly is he exempt from then? The 10 year rule says he must start in year 1 regardless of age but if he's exempt what is he exempt from?

He's exempt from having to empty the account within 10 years, but he must start taking RMDs based on his life expectancy beginning in the year following the person's death. If they died in 2020, he has to take his first RMD in 2021 so in the next 17 days.

[cathy63]

Quote:

Originally Posted by marko I must be missing something. My brother is disabled and according to what I understand as the exemption, he's exempt from the 10 year, inherited IRA rule and falls into the 'normal' age of withdrawals. Where am I out in the weeds here? On second thought: However, there are exceptions to the 10-year rule for certain types of beneficiaries: a surviving spouse, a disabled beneficiaries are not obligated to empty the IRA. But unless they can treat the account as their own (see "Special Rules for Surviving Spouses," below), they do have to take annual RMDs from it; the exact amount can be calculated based on their own life expectancy. Are they saying that while RMDs are required after one year, regardless of age the AMOUNT required to withdraw is based on age vs a 10 year horizon? My take was that due to disability the rule didn't apply at all and he could revert to his normal age of withdrawal. No? Is just the 10 year horizon the exempt part or is it the start time?

For an inherited IRA, RMDs start the year after death. They do not use the "normal" age of 72.

Yes, that quote is saying that RMDs are required every year and they are based on the age of the beneficiary. The SECURE Act basically says that the new 10-year rule doesn't apply if the beneficiary is disabled or meets one of the other eligible conditions. Instead, he gets to use the "old" rule for taking RMDs over his own life expectancy starting this year. There has never been a rule that said a non-spouse beneficiary could wait to age 72 for an inherited IRA. That's why the Single Life Expectancy Table the IRS publishes starts at 0. If younger people never needed to take RMDs, there'd be no need for any number below age 72.

Here's the relevant example from Pub 590-B.

Quote:

Example. Your brother died in 2020 at age 74. You are the designated beneficiary of your brother’s traditional IRA. You are 65 years old in 2021, which is the year following your brother's death. You use Table I and see that your life expectancy in 2021 is 21.0. If the IRA was worth $100,000 at the end of 2020, your required minimum distribution for 2021 would be $4,762 ($100,000 ÷ 21.0).

[marko]

Quote:

Originally Posted by disneysteve He's exempt from having to empty the account within 10 years, but he must start taking RMDs based on his life expectancy beginning in the year following the person's death. If they died in 2020, he has to take his first RMD in 2021 so in the next 17 days.

Ah!!!! Thank you. Now...couldn’t he wait say 5 years before his first withdrawal and take out the full amount? Or must he start this year?

[disneysteve]

Quote:

Originally Posted by marko Ah!!!! Thank you. Now...couldn’t he wait say 5 years before his first withdrawal and take out the full amount? Or must he start this year?

He has to start RMDs in the year following the year of death.

I inherited an IRA when my cousin died in May. I have to start withdrawals in 2022 based on my life expectancy since I also qualify for the exemption.

[cathy63]

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Originally Posted by SecondCor521 I agree with most of what you wrote. I especially agree with you that taking RMDs starting this year is probably the best solution. But I do think that OP's brother does have the option of making the mistake of not starting RMDs this year and still doing a stretch IRA. He could do this by taking his 2021 RMD early in 2022 and his 2022 RMD sometime next year. He could then apologize for his late 2021 RMD and ask the IRS to waive the excess deferral penalty for 2021. Again, starting RMDs in 2021 is probably best. I'm just suggesting that OP's brother isn't locked into the 10 year window if he dithers for another 20 days or so and takes no action during that time.

Yeah, he could ask for forgiveness if he waits a few weeks and takes both RMDs in 2022.

I personally wouldn't risk it because the penalties are so huge if the IRS decides to be mean about it. Though at least if he asks for forgiveness in 2022, he'd have an answer before 2030 and be able to remove the rest of the money then in order to comply with the 10-year rule.

It's so easy to avoid the issue though. Morgan Stanley can process a withdrawal in minutes if someone tells them how much it should be.

[cathy63]

Quote:

Originally Posted by marko Ah!!!! Thank you. Now...couldn’t he wait say 5 years before his first withdrawal and take out the full amount? Or must he start this year?

If he's going to use the RMD method over his life expectancy it starts this year. If he waits 5 years and takes out all 5 RMDs at once, then the penalty for being late is 50% of the first 4 years amounts. Which, as SecondCor521 points out, you can ask to have waived, but you're depending on mercy from the IRS if you do.

Now, if he waits 5 years and empties the entire account, that's fine. He's just electing to use the 10-year window instead of RMDs over his lifetime and completing the process early. No penalty for that.

[SecondCor521]

Quote:

Originally Posted by cathy63 It's so easy to avoid the issue though. Morgan Stanley can process a withdrawal in minutes if someone tells them how much it should be.

And the calculation can be done in about 10 minutes. But this thread might still be going 17 days from now ;-)

OP, as people have been saying, probably the best thing is for your brother to take his RMD this year. It's just his 2020 year end value divided by the appropriate divisor for his age this year based on the appropriate IRS table.

Even if you change your mind later, doing the RMD now preserves his options to do either (RMD over his life expectancy or 10 year SECURE Act method). And taking an RMD this year is probably not that much - it would be maybe 2% or 3% of the account value.

[marko]

Thank you to all!
What I missed was that I thought being exempt meant he could do just a normal IRA age withdrawal(idiot!).
I'll call MS today and straighten it out and get it going. I thought he was exempt from the entire thing.

Once again the collective wisdom here has saved me a lot of hurt!

[cathy63]

Just one more point on the difference between RMDs for inherited IRAs and original owners. RMDs drain an inherited account much faster than an original owner's account. For an inherited IRA, you only look up the divisor for the first year and you subtract 1 for every year after that, so there's a definite end date by which you'll empty the account. For example, if the beneficiary is 65 in the year of his first RMD, he will have a life expectancy of 21 and as you keep subtracting you'll get to a divisor of 1 when he's 86, and that will be it.

For an original owner you look up the divisor every year, and an 86 yr old only has to divide the balance by 14.1 (or more if there's a much younger spouse). There's never an age at which you're required to empty an IRA that you funded.

[marko]

Quote:

Originally Posted by cathy63 Just one more point on the difference between RMDs for inherited IRAs and original owners. RMDs drain an inherited account much faster than an original owner's account. For an inherited IRA, you only look up the divisor for the first year and you subtract 1 for every year after that, so there's a definite end date by which you'll empty the account. For example, if the beneficiary is 65 in the year of his first RMD, he will have a life expectancy of 21 and as you keep subtracting you'll get to a divisor of 1 when he's 86, and that will be it. For an original owner you look up the divisor every year, and an 86 yr old only has to divide the balance by 14.1 (or more if there's a much younger spouse). There's never an age at which you're required to empty an IRA that you funded.

cathy63: Thanks for taking the time with a such a knucklehead.
Once I got over the idea that my brother's exemption does not mean he can treat it like a regular IRA, it all fell into place.

Waiting for a call from MS now to make the move.

[USGrant1962]

It looks like IRS has reconsidered and is proposing that RMDs are required for non-eligible beneficiaries if the decedent was already taking RMDs themselves. This is in addition to the 10-year time limit to empty the account.

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the new Proposed Regulations seek to implement a system that would require Non-Eligible Designated Beneficiaries inheriting from retirement account owners who died on or after their Required Beginning Date to comply with the 10-year distribution requirement in addition to taking annual RMDs during that period.

https://www.kitces.com/blog/irs-prop...hrough-trusts/

So the requirements will be a matrix between eligible/non-eligible beneficiary and pre-RMD/post-RMD death age.