PSA: Inherited IRA and RMD

[marko]

I learned of a twist in the Inherited IRA for some people.

As I understand it, under current regulations, those with an inherited IRA must begin RMD withdrawals within a year of the benefactor's death and have it fully depleted within 10 years.

BUT! There are exceptions:
Per my accountant:

Exceptions to the 10-Year Rule

However, there are exceptions to the 10-year rule for certain types of beneficiaries:

a surviving spouse, a disabled or chronically ill person, a child who hasn't reached the age of majority, a person not more than 10 years younger than the IRA account owner

These 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.

So, as I read it, my brother who is fully, certifiably disabled only needs to adhere to the normal IRA RMD rules.

Having said that, does anyone know how do I inform the IRS of his exemption? He likely won't need the money in this account for a very long time, if ever.
Is there someplace on his tax return?

He could end up needlessly in hot water if he doesn't comply with the original regulation.

I spoke to the administrators of the IRA and they were clueless of this exemption.

 

[all4j]

I learned of a twist in the Inherited IRA for some people.

As I understand it, under current regulations, those with an inherited IRA must begin RMD withdrawals within a year of the benefactor's death and have it fully depleted within 10 years.

BUT! There are exceptions:
Per my accountant:

Exceptions to the 10-Year Rule

However, there are exceptions to the 10-year rule for certain types of beneficiaries:

a surviving spouse, a disabled or chronically ill person, a child who hasn't reached the age of majority, a person not more than 10 years younger than the IRA account owner

These 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.

So, as I read it, my brother who is fully, certifiably disabled only needs to adhere to the normal IRA RMD rules.

Having said that, does anyone know how do I inform the IRS of his exemption? He likely won't need the money in this account for a very long time, if ever.
Is there someplace on his tax return?

He could end up needlessly in hot water if he doesn't comply with the original regulation.

I spoke to the administrators of the IRA and they were clueless of this exemption.

I would expect that this would need to be established at the time the inherited ira was formed for the disabled beneficiary. Then as distributions are made, the 1099-r would be correctly coded. Are you saying that there is a case where this occurred after the passage of the SECURE act but no provision was made? Have there already been distributions made? A little more info might help.

 

[GrayHare]

I'd file a statement with the tax return, something like, "RMD taken because of exemption from 10-year rule due to disability, doctor's statement attached." What's not clear to me is which rules apply if the beneficiary's disability status changes after inheriting the IRA.

 

[MissMolly]

As I understand it, under current regulations, those with an inherited IRA must begin RMD withdrawals within a year of the benefactor's death and have it fully depleted within 10 years.

The bolded part is not correct. You just have to deplete in 10 years. No requirement to begin within one year.

 

[cathy63]

I learned of a twist in the Inherited IRA for some people.

As I understand it, under current regulations, those with an inherited IRA must begin RMD withdrawals within a year of the benefactor's death and have it fully depleted within 10 years.

This is not quite right. The heir does have to deplete the inherited IRA within 10 years, but there is no RMD and no requirement to begin withdrawals within a year of the original owner's death. You can empty the entire account in year 10 if you want.

BUT! There are exceptions:
Per my accountant:

Exceptions to the 10-Year Rule

However, there are exceptions to the 10-year rule for certain types of beneficiaries:

a surviving spouse, a disabled or chronically ill person, a child who hasn't reached the age of majority, a person not more than 10 years younger than the IRA account owner

These 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.

So, as I read it, my brother who is fully, certifiably disabled only needs to adhere to the normal IRA RMD rules.

Having said that, does anyone know how do I inform the IRS of his exemption? He likely won't need the money in this account for a very long time, if ever.
Is there someplace on his tax return?

He could end up needlessly in hot water if he doesn't comply with the original regulation.

I spoke to the administrators of the IRA and they were clueless of this exemption.

If your brother meets the disability criteria described in the SECURE act (which are basically the same as the criteria for SSDI), then he needs to start taking RMDs based on his own life expectancy in the calendar year after the death of the original account owner. It doesn't matter whether he needs the money or not or how old he is now, he still has to take RMDs.

You don't report this to the IRS as an exception. You just take out the RMD and then fill out his tax return as normal, using the 1099-R that he will receive from the account custodian. If your brother gets audited, he just needs to have the records that show he is disabled and how he calculated his RMDs. Pub 590-B has the single life expectancy table you need to calculate RMDs for inherited IRAs.

 

[Doingitwrong]

You inform the custodian that has the RMDs set up in their system.
Law = Twist always cracks me up. Like “loophole” does.

 

[Doingitwrong]

“The IRS also clarified that while EDBs continue to qualify to receive lifetime distributions from their inherited IRAs based on the EDB’s life expectancy (thus the concept of the “stretch IRA”), the EDB can elect the 10-year rule. This is only true if the IRA owner’s death occurred before his or her required beginning date. For individual born before July 1, 1949, the required beginning date is April 1 following the year the individual becomes age 70.5; for individuals born after June 30, 1949, the required beginning date is April 1 following the year the individual becomes age 72.

In some situations, an EDB may prefer the flexibility of the 10-year rule rather than having to be locked into a rigid “stretch IRA” RMD schedule each year, even if that period may extend beyond the 10 years.“

 

[marko]

If your brother meets the disability criteria described in the SECURE act (which are basically the same as the criteria for SSDI), then he needs to start taking RMDs based on his own life expectancy in the calendar year after the death of the original account owner. It doesn't matter whether he needs the money or not or how old he is now, he still has to take RMDs.

You don't report this to the IRS as an exception. You just take out the RMD and then fill out his tax return as normal, using the 1099-R that he will receive from the account custodian. If your brother gets audited, he just needs to have the records that show he is disabled and how he calculated his RMDs. Pub 590-B has the single life expectancy table you need to calculate RMDs for inherited IRAs.

Yes, but he won't reach normal RMD age for another 7 years so he could be in trouble with the IRS (who doesn't know he's disabled), if he doesn't deplete it within 10 years.

The account custodian (Morgan Stanley) had no idea about the exemption until I told them nor do they know how to classify it for that exemption.

Between the custodian who wants him to deplete in 10 years and the IRS who doesn't know he's exempt I'm wondering how to advise the IRS except to make the withdrawal in the allotted 10 years.

 

[gauss]

None of this applies unless the person who originally owned the IRA and died passed away after 2019. If the original owner died in 2019 or before, then the "old rules" would apply.

-gauss

 

[Act2]

If you go to the IRS.gov website, the disabled person is called an “eligible designated beneficiary”, which is different from just being a “designated beneficiary”. There is information about this special type of beneficiary and their options in Publication 590-B on the IRS website. I’d link you to it but I can’t figure out how to do that.

 

[marko]

None of this applies unless the person who originally owned the IRA and died passed away after 2019. If the original owner died in 2019 or before, then the "old rules" would apply.

-gauss

Original owner died in 2020

 

[marko]

If you go to the IRS.gov website, the disabled person is called an “eligible designated beneficiary”, which is different from just being a “designated beneficiary”. There is information about this special type of beneficiary and their options in Publication 590-B on the IRS website. I’d link you to it but I can’t figure out how to do that.

Thanks but at this point I'm going to leave this to our accountant. That's what we pay him a retainer for.

 

[gauss]

Ok. Thank you for the clarification.

I am dealing with a similar issue for a death that resulted in 2019, that we still don't have access to, and it is getting trickier to get info on the "old rules."

-gauss

 

[SecondCor521]

Yes, but he won't reach normal RMD age for another 7 years so he could be in trouble with the IRS (who doesn't know he's disabled), if he doesn't deplete it within 10 years.

The account custodian (Morgan Stanley) had no idea about the exemption until I told them nor do they know how to classify it for that exemption.

Between the custodian who wants him to deplete in 10 years and the IRS who doesn't know he's exempt I'm wondering how to advise the IRS except to make the withdrawal in the allotted 10 years.

As @cathy63 said, you don't need to tell the IRS or your brother's IRA custodian anything ahead of time. Just follow the rules and if the IRS audits, be able to prove what you did.

 

[cathy63]

Yes, but he won't reach normal RMD age for another 7 years so he could be in trouble with the IRS (who doesn't know he's disabled), if he doesn't deplete it within 10 years.

The account custodian (Morgan Stanley) had no idea about the exemption until I told them nor do they know how to classify it for that exemption.

Between the custodian who wants him to deplete in 10 years and the IRS who doesn't know he's exempt I'm wondering how to advise the IRS except to make the withdrawal in the allotted 10 years.

"Normal RMD age" is not relevant for an inherited IRA. Even if your brother is only 65 now, he is required to take an RMD by December 31 this year since the original owner died last year. He cannot wait until he reaches age 72. He has to take at least [account value as of 12/31/2020] divided by 21 this year.

Morgan Stanley has no responsibility for the withdrawals. They are required to do whatever your brother (or you, if you are his custodian) tells them to do and then report whatever he actually does to the IRS. They can advise that they think he is required to use the 10-year window, and you can tell them they're wrong, but it doesn't really matter. They can't force him to take the money any sooner than he wants to, and there's no penalty on them for giving incorrect advice except that they may lose you and your brother as customers.

Your brother cannot get in trouble with the IRS. Might they send a letter asking about the account ten years from now? Yes, they might (but they probably won't). If that happens you and your brother explain that he is an eligible designated beneficiary by reason of his disability so he is entitled to the stretch IRA and he has indeed taken the correct RMD every year starting in 2021. That's not getting in trouble or hot water, it's just normal business communication between the IRS and the taxpayer. You can't prevent this or explain it away now. You could try attaching a statement to his return, but there's no guarantee they'll read it and they can always ask for proof anyway.

The key here is that the RMDs have to start in 2021. If he doesn't take his RMD this year, then he definitely has to empty the account in 10 years (9 of which are left). Otherwise in year 11 he'll really be in hot water. At that point, the IRS probably would decide that since he didn't take an RMD in year 1, he had elected to use the 10-year window and they would penalize him 50% of all the money remaining in the account at that time.

Here is the link to IRS pub 590-B. Please look at the examples for RMDs on inherited IRAs, some are similar to your situation. https://www.irs.gov/pub/irs-pdf/p590b.pdf

 

[SecondCor521]

The key here is that the RMDs have to start in 2021. If he doesn't take his RMD this year, then he definitely has to empty the account in 10 years (9 of which are left). Otherwise in year 11 he'll really be in hot water. At that point, the IRS probably would decide that since he didn't take an RMD in year 1, he had elected to use the 10-year window and they would penalize him 50% of all the money remaining in the account at that time.

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.

 

[disneysteve]

The account custodian (Morgan Stanley) had no idea about the exemption until I told them

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.


I recently inherited an IRA and fall under the exemption as well because I'm less than 10 years younger than the deceased. I'll start the RMDs next year (he died this year) and Vanguard will handle the whole process for me.

 

[MandM]

marko, just my 2 cents but I would strongly take what "cathie63" says seriously. She has the experience and knowledge in this area and with the limited time before you need to make that withdrawal by Dec. 31st, I would talk with your accountant now to meet that deadline to qualify for stretch IRA.



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[marko]

"Normal RMD age" is not relevant for an inherited IRA. Even if your brother is only 65 now, he is required to take an RMD by December 31 this year since the original owner died last year. He cannot wait until he reaches age 72. He has to take at least [account value as of 12/31/2020] divided by 21 this year.

]

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?

 

[SecondCor521]

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?

Yes, that's correct.

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?

No, not for an inherited IRA.

Is just the 10 year horizon the exempt part or is it the start time?

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.)

 

[SecondCor521]

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]

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]

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]

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.

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).