RMDs Do Apply to Inherited IRAs says IRS

[USGrant1962]

A newsletter pointed me to this. The new 2020 IRS Pub 590-B still requires non-spouse IRA beneficiaries to take RMDs, they've interpreted the SECURE Act 10-year rule as an "and". As in you must take RMDs and fully distribute the account in 10 years. From the pub:

Quote:

Other designated beneficiary. Use the life expectancy listed in the table next to the beneficiary’s age as of his or her birthday in the year following the year of the owner’s death. Reduce the life expectancy by 1 for each year since the year following the owner’s death. However, if you are a designated beneficiary who is not an eligible designated beneficiary, the entire account balance must be fully distributed within 10 years after the owner's death.

and

Quote:

Example. Your father died in 2020. You are the designated beneficiary of your father's traditional IRA. You are 53 years old in 2021, which is the year following your father's death. You use Table I and see that your life expectancy in 2021 is 31.4. If the IRA was worth $100,000 at the end of 2020, your required minimum distribution for 2021 would be $3,185 ($100,000 ÷ 31.4).

I also looked at the SECURE Act law (PL 116-94) and it says nothing about suspending RMDs. I don't know where the "punt RMDs for 10 years" idea actually came from.

The newsletter suggests this came as a surprise to financial planners, and that IRS Publications are not regulations, so things could change. IRS has not yet issued its official regulations on the matter yet (26 CFR) and there is always tax court.

Hmmm.

[phil1ben]

Wow, if this is correct a lot of pundits, tax lawyers, accountants and CFPs got caught with their pants down.

So if the example is correct, with respect to the beneficiary of an inherited IRA who is not a spouse, they must annually take the RMD each year based on their life expectancy with all amounts distributed within 10 years from the decedent's death?

[EastWest Gal]

I understand that the RMD system prior to new legislation is grandfathered in. I have an inherited IRA. I have taken a couple thousand over my calculated required RMD each year.

Many resources have indicated this. One link is posted here.

https://www.forbes.com/sites/bobcarl...h=68c39d0069f0

This was not a surprise. Pundits, accountants, financial planners should have been paying attention. That is their J.O.B.

It really depends on when the inherited IRA happened. This is not new.

[cathy63]

Quote:

Originally Posted by EastWest Gal I understand that the RMD system prior to new legislation is grandfathered in. I have an inherited IRA. I have taken a couple thousand over my calculated required RMD each year. Many resources have indicated this. One link is posted here. https://www.forbes.com/sites/bobcarl...h=68c39d0069f0 This was not a surprise. Pundits, accountants, financial planners should have been paying attention. That is their J.O.B. It really depends on when the inherited IRA happened. This is not new.

If you inherited your IRA before 2020, then you do have an RMD and you have to continue with it. That's well understood by financial advisors and is what people have been doing all along. The SECURE act didn't change anything for people in that situation and I haven't seen any professional source that indicated otherwise.

Up to now, the understanding has been that the SECURE act says if you inherited an IRA in 2020 or later, you just have to empty it in 10 years (unless you fall under one of the few exceptions) and it would be o.k. to do so by taking $0 for 9 years and the entire balance in the 10th year. The article you linked to says this, as do many other financial planning blogs and brokerage sites. The new info that's just come out is the IRS does not agree with that interpretation of the law. They are now saying that post-SECURE act heirs still have to take at least the amount of an RMD for the entire 10 years, but in the 10th year they will also have to take a full distribution of the remaining funds.

Fortunately they have communicated this info in a timely enough fashion that nobody is behind on their RMDs and likely to be penalized.

[USGrant1962]

Quote:

Originally Posted by EastWest Gal I understand that the RMD system prior to new legislation is grandfathered in. I have an inherited IRA. I have taken a couple thousand over my calculated required RMD each year. Many resources have indicated this. One link is posted here. https://www.forbes.com/sites/bobcarl...h=68c39d0069f0 This was not a surprise. Pundits, accountants, financial planners should have been paying attention. That is their J.O.B. It really depends on when the inherited IRA happened. This is not new.

The issue isn't 2019 versus 2020 deaths and the new 10-year rule versus grandfathered IIRAs under the old rules. That has been clear all along. In your link from January, Bob Carlson says:

Quote:

But the SECURE Act abolished the Stretch IRA for most beneficiaries. In most cases, the inherited IRA must be fully distributed within 10 years after the original owner passed away. The beneficiary can distribute the IRA on any schedule, but the IRA must be fully distributed by the end of 10 years.

IRS now says RMDs apply so you cannot "distribute the IRA on any schedule" but must take at least the RMD amount each year AND distribute the full amount within 10 years.

FWIW, the newsletter that pointed this issue out to me today was Bob Carlson's.

[phil1ben]

Quote:

Originally Posted by EastWest Gal I understand that the RMD system prior to new legislation is grandfathered in. I have an inherited IRA. I have taken a couple thousand over my calculated required RMD each year. Many resources have indicated this. One link is posted here. https://www.forbes.com/sites/bobcarl...h=68c39d0069f0 This was not a surprise. Pundits, accountants, financial planners should have been paying attention. That is their J.O.B. It really depends on when the inherited IRA happened. This is not new.

The article that you quote also got it wrong. The link you provided states, "But the SECURE Act abolished the Stretch IRA for most beneficiaries. In most cases, the inherited IRA must be fully distributed within 10 years after the original owner passed away. The beneficiary can distribute the IRA on any schedule, but the IRA must be fully distributed by the end of 10 years."

What I think the OP is saying (by quoting the example) is that the beneficiary of an inherited IRA (that comes into effect after the date of the Secure Act's applicability) cannot distribute "on any schedule" but must take an RMD annually based on the beneficiary's life expectancy and further provided all is distributed within 10 years. What the pundits have been saying is that you do not need to take any RMD annually but must distribute the IRA entirely within 10 years from the date of death.

[cathy63]

Here's what Fidelity currently says about distributions from recently inherited IRAs. I suspect this page will be changing soon, so here's a screenshot as well. https://www.fidelity.com/building-sa...erited-ira-rmd

[SevenUp]

And then there's this from Weighing in on disputed language in IRS 10-year RMD rule - InvestmentNews:

Quote:

I am now 100% convinced that the idea of annual required minimum distributions under the 10-year rule was an IRS error that will soon be corrected. As of this writing, IRS has still not officially said this publicly or corrected the publication, but some sources have said that IRS officials have told them this privately.

[USGrant1962]

Quote:

Originally Posted by SevenUp And then there's this from Weighing in on disputed language in IRS 10-year RMD rule - InvestmentNews:

OK, so that explains where the no-RMD idea came from. The 10-year rule was a take-off from the older 5-year rule that does suspend RMDs.

[OldShooter]

I'll be very interested to see how this gets sorted out. For fifteen years I have been taking RMDs from the inherited Roth my mother left me. So when does this ten-year clock start ticking anyway?

[SecondCor521]

When the SECURE Act originally became law, I read the original language very carefully to understand what it said. I am not a lawyer, and I admit I read it very carefully with the assistance of several articles at the time, but having said that, I remember very clearly that the 10 year period that was established was based on another portion of the law where there was a 5 year period to drain an account, and that 5 year period clearly (to me anyway) did not involve RMDs.

I reread Pub 590B (well, the parts that seemed relevant) and it seems pretty clear to me that the 10 year rule is in there (page 11), that it is an election available to the IRA beneficiaries, and that it doesn't require RMDs during the 10 year period.

I think the interpretation in the newsletter the OP alludes to misunderstands Pub 590B. I think the example cited of a 53 year old father is a poorly chosen one, but is just used to show what the RMD calculation is like in that circumstance. When it talks about the 10 year rule in that same publication, it's very clear (to me anyway) that the RMD isn't required to be taken during the 10 years.

[SecondCor521]

Quote:

Originally Posted by OldShooter I'll be very interested to see how this gets sorted out. For fifteen years I have been taking RMDs from the inherited Roth my mother left me. So when does this ten-year clock start ticking anyway?

You're grandfathered, so it doesn't apply to you. You still get to use the RMD method (although there's a tricky procedure to switch to the new RMD tables which you should familiarize yourself with).

But for those to whom it does apply, the rule is actually the end of the year which contains the 10 year anniversary of the IRA owner's death. So if your mother had instead passed away today, 4/29/21, then the 10 year anniversary of her death would be 4/29/31, and you'd have until 12/31/31 to drain the IRA.

[SecondCor521]

If the 5 year period in the SECURE Act is the same as the 5 year period in Pub 590B (I think it is, but am not 100% certain), then the language in Pub 590B is very clear. Note especially the last sentence below:

"5-year rule. The 5-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw 100% of the IRA by December 31 of the year containing the fifth anniversary of the owner’s death. For example, if the owner died in 2019, the beneficiary would have to fully distribute the plan by December 31, 2024.
The beneficiary is allowed, but not required, to take distributions prior to that date."

-- 2020 Pub 590B, page 11, column 1 (https://www.irs.gov/pub/irs-pdf/p590b.pdf)

[rk911]

Quote:

Originally Posted by phil1ben Wow, if this is correct a lot of pundits, tax lawyers, accountants and CFPs got caught with their pants down. So if the example is correct, with respect to the beneficiary of an inherited IRA who is not a spouse, they must annually take the RMD each year based on their life expectancy with all amounts distributed within 10 years from the decedent's death?

my wife is likely to be inheriting her late brother's IRA so if true and assuming it all must go within 10-yrs that means 1/10th of the total value at the first RMD, 2/10th of the total value at the second, etc. do i have that right?

[audreyh1]

Quote:

Originally Posted by rk911 my wife is likely to be inheriting her late brother's IRA so if true and assuming it all must go within 10-yrs that means 1/10th of the total value at the first RMD, 2/10th of the total value at the second, etc. do i have that right?

Is your wife within 10 years of her brother’s age? Then the 10 year rule does not apply.

[Sunset]

Quote:

Originally Posted by rk911 my wife is likely to be inheriting her late brother's IRA so if true and assuming it all must go within 10-yrs that means 1/10th of the total value at the first RMD, 2/10th of the total value at the second, etc. do i have that right?

It will be more complex than that, as the IRA will grow each year. Same reason the normal RMD tables increase the % taken out each year, otherwise the IRA would never empty.

But I'm not a math whiz to know the formula.

[Done]

Ed Slott published an article on this but recommends delaying distributions until the IRS further clarifies.

“We need to stress that the IRS’s apparent interpretation in Publication 590-B is not official guidance. For this reason, we recommend that beneficiaries subject to the 10-year rule hold off from taking RMDs in 2021 until later this year by which time the IRS will hopefully clarify this mess with official guidance.”

[Done]

Quote:

Originally Posted by audreyh1 Is your wife within 10 years of her brother’s age? Then the 10 year rule does not apply.

In case this helps, the wife doesn’t have to be within 10 years of her brother’s age, just not more than 10 years younger. This also means if she is older by any amount, she is exempt from the 10-year distribution rule.

Source

[audreyh1]

Quote:

Originally Posted by Done In case this helps, the wife doesn’t have to be within 10 years of her brother’s age, just not more than 10 years younger. This also means if she is older by any amount, she is exempt from the 10-year distribution rule. Source

Right, of course, younger. For some reason I was under the impression that the wife was younger than her deceased brother.

[ncbill]

Wonder if IRS added this interpretation to prevent gaming the system.

E.g. parent dies 2021, kid sets up their new inherited IRA at one custodian, never takes a distribution, then in 2030 moves it to another custodian, telling the new custodian their parent died in 2028...lather, rinse, repeat...sweet deal, even sweeter if it's an inherited Roth IRA.

When I moved my inherited IRA (under the old rules) to a new custodian that firm took all data on death, age at death, etc. directly from me with no verification whatsoever requested or required.