Thoughts on Inherited IRA Withdrawals

[FiveDriver]

I'm doing a little forward planning these days. I know that the IRS wants any Inherited IRA's to be drawn down within 10 years of the Date of My Demise.

My IRA's hold a rather large portion of my assets. In the event of my passing, these withdrawals will push DW into a higher Tax Bracket. Then, as a single filer, DW would get boosted into the 32% bracket or higher.

Is there any way to lessen that Tax Bite ??

 

[NgineER]

Your wife could transfer your IRA to her own and treat it as her own, no need to withdraw it in ten years if transferred to her own IRA. She'd still get the bite of filing as single.

How old are you, are you collecting SS , pension etc?

Try to even out the tax bite by doing some Roth conversions perhaps... You'd likely be in a lower tax bracket filing as joint vs. filing as single.

 

[FiveDriver]

Your wife could transfer your IRA to her own and treat it as her own, no need to withdraw it in ten years if transferred to her own IRA. She'd still get the bite of filing as single.

How old are you, are you collecting SS , pension etc?

Try to even out the tax bite by doing some Roth conversions perhaps... You'd likely be in a lower tax bracket filing as joint vs. filing as single.

I didn't realize that a transfer of my Inherited IRA into her own IRA was allowed.....I'll look into that. That would smooth things out.

I'm collecting SS and a Pension, from which she will get Spousal Benefits.

As I understand the rules, inheriting a Roth IRA is treated differently.....and this may better suit my DD.

 

[Al18]

Inherited IRA rules seem complicated. There are many posts on inherited IRA’s at https://irahelp.com/slottreport/

 

[SecondCor521]

Whomever inherits the IRA has until 12/31 of the year containing the 10th anniversary of your Date of Demise. This can be 11 tax years.

Other than what has already been mentioned, you could consider leaving the IRA to people in lower tax brackets, such as children or grandchildren. This can be a useful idea if the surviving spouse has enough other assets to live on.

You could also consider leaving it to multiple people, to spread out the tax burden such that any individual's tax burden is "reasonable". If, for example, you left it to three people and they had 11 tax years, their withdrawals annually would only be about 1/3*11 = 1/33 of your traditional IRA balance on your Date of Demise (ignoring asset appreciation inside the IRA over the 10/11 year period).

The rules for Roth IRAs are the same, except there are no annual RMDs on inherited Roth IRAs like there might soon be on inherited traditional IRAs.

 

[FiveDriver]

Inherited IRA rules seem complicated. There are many posts on inherited IRA’s at https://irahelp.com/slottreport/

The language is a little convoluted, but it does appear that a surviving spouse IS an "Eligible Designated Beneficiary" and can roll an Inherited IRA into her own separate IRA Account. She can then take out RMD's based on her Life Expectancy tables.

This appears to avoid the 10 Year Rule on required withdrawals. Which is what I was trying to do.

 

[Bogie]

Whomever inherits the IRA has until 12/31 of the year containing the 10th anniversary of your Date of Demise. This can be 11 tax years.

Other than what has already been mentioned, you could consider leaving the IRA to people in lower tax brackets, such as children or grandchildren. This can be a useful idea if the surviving spouse has enough other assets to live on.

You could also consider leaving it to multiple people, to spread out the tax burden such that any individual's tax burden is "reasonable". If, for example, you left it to three people and they had 11 tax years, their withdrawals annually would only be about 1/3*11 = 1/33 of your traditional IRA balance on your Date of Demise (ignoring asset appreciation inside the IRA over the 10/11 year period).

The rules for Roth IRAs are the same, except there are no annual RMDs on inherited Roth IRAs like there might soon be on inherited traditional IRAs.

I think even before the Secure Act you had to take RMDs on a non-spousal inherited ROTH.

 

[SecondCor521]

I think even before the Secure Act you had to take RMDs on a non-spousal inherited ROTH.

I believe that's incorrect. RMDs have never been required on inherited Roth IRAs AFAIK. IRS Pub 590-B would be the place to look.

 

[pb4uski]

The language is a little convoluted, but it does appear that a surviving spouse IS an "Eligible Designated Beneficiary" and can roll an Inherited IRA into her own separate IRA Account. She can then take out RMD's based on her Life Expectancy tables.

This appears to avoid the 10 Year Rule on required withdrawals. Which is what I was trying to do.

10 year rule only applies to non-spousal beneficiaries.

Spousal beneficiaries have the same results for inherited IRAs as for their own contributory IRAs.

 

[TickTock]

DW has an inherited IRA from her DM (happened in 2021). The rules are complicated and have changed several times in the past five years - including retroactively (or alternatively, the *interpretation* of the rules has changed. Either way, it retroactively changed.)

As I understand it, the 10-year rule applies. And DW has to take withdrawals based on her RMDs. Which, as she is under the first RMD year, I believe to be zero. Of course, I'll be confirming this with my CPA - after tax season is over.

 

[SecondCor521]

As I understand it, the 10-year rule applies. And DW has to take withdrawals based on her RMDs. Which, as she is under the first RMD year, I believe to be zero. Of course, I'll be confirming this with my CPA - after tax season is over.

If the original owner died in 2021, then your DW is probably subject to the 10 year rule. The IRS is currently trying to implement rules which also require annual RMDs during the 10 year period, even if your DW is under age 73/75. If those rules go into effect, your DW would have to look up her initial divisor from Table 1 (not table 3) in IRS Pub 590-B. Then each subsequent year, she would subtract 1 from that divisor. The balance would need to be distributed in year 10.

 

[pb4uski]

^^^ +1 Since the IRA that I inherited from my mother was not a lot of money (she was 93 so had already done a lot of RMDs over the years and then what was left was divided by 5) I decided to just withdraw it all in 2024 rather than risk forgetting to do a RMD or take out the entire balance within 10 years.

 

[donheff]

In my tax planning, I always assumed that if DW or I die, the other will take RMDs from the inherited IRA on our schedule. But do we have to? Can will elect to deal with it on the standard ten year schedule? If we get old enough, we will get to the point where 10 years is not in the picture. In that case sitting on it could save taxes.

 

[Bogie]

I believe that's incorrect. RMDs have never been required on inherited Roth IRAs AFAIK. IRS Pub 590-B would be the place to look.

I found this in the publication you cited.


"
Must You Withdraw or Use Assets?

https://www.irs.gov/publications/p590bhttps://www.irs.gov/publications/p590b You aren't required to take distributions from your Roth IRA at any age. The minimum distribution rules that apply to traditional IRAs don't apply to Roth IRAs while the owner is alive. However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs as explained later under Distributions After Owner's Death."

 

[NgineER]

In my tax planning, I always assumed that if DW or I die, the other will take RMDs from the inherited IRA on our schedule. But do we have to? Can will elect to deal with it on the standard ten year schedule? If we get old enough, we will get to the point where 10 years is not in the picture. In that case sitting on it could save taxes.

If the deceased has started RMDs you are out of luck and can't do the 10 year distribution.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary

Death of the account holder occurred in 2020 or later
Spousal beneficiary options
If the account holder's death occurred prior to the required beginning date, the spouse beneficiary may:

Keep as an inherited account
Delay beginning distributions until the employee would have turned 72
Take distributions based on their own life expectancy
Follow the 10-year rule
Roll over the account into their own IRA
If the account holder's death occurred after the required beginning date, the spouse beneficiary may:

Keep as an inherited account
Take distributions based on their own life expectancy, or
Rollover the account into their own IRA

 

[SecondCor521]

I found this in the publication you cited.


"
Must You Withdraw or Use Assets?

https://www.irs.gov/publications/p590bhttps://www.irs.gov/publications/p590b You aren't required to take distributions from your Roth IRA at any age. The minimum distribution rules that apply to traditional IRAs don't apply to Roth IRAs while the owner is alive. However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs as explained later under Distributions After Owner's Death."

Right. I think you just need to follow the IRS bouncing ball rules further.

From the link in the quote you cited (emphasis added):

"Distributions After Owner's Death
If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his or her required beginning date. See When Can You Withdraw or Use Assets? in chapter 1."

Which links to the following series of quotes (emphasis added):

"The rules for determining required minimum distributions for beneficiaries depend on whether:

The beneficiary is the surviving spouse.
The beneficiary is an eligible designated beneficiary (defined later) other than the surviving spouse.
The beneficiary is an individual (other than an eligible designated beneficiary).
The beneficiary isn't an individual (for example, the beneficiary is the owner's estate). (But see Trust as beneficiary, later, for a discussion about treating trust beneficiaries as designated beneficiaries.)
The IRA owner died before the required beginning date, or died on or after the required beginning date."

(The case I happen to be interested in is an individual who is not an eligible designated beneficiary, which also happens to be a common case.)

Because we're talking about Roth IRAs, the following paragraph appears to apply:

"Owner Died Before Required Beginning Date
If the owner died before his or her required beginning date (defined earlier) and you are an eligible designated beneficiary, you must generally base required minimum distributions for years after the year of the owner's death using your single life expectancy shown in Table I in Appendix B, as determined under Beneficiary an individual, later.

However, there are situations where an individual designated beneficiary may be required to take the entire account balance by the end of the 10th year following the year of the owner's death. See 10-year rule, later."

And the 10 year rule says (emphasis added):

"10-year rule. The 10-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner’s death. For example, if the owner died in 2022, the beneficiary would have to fully distribute the IRA by December 31, 2032. The beneficiary is allowed, but not required, to take distributions prior to that date."

It is that last sentence which is the "money quote", and is what the IRS is currently working to change.

(All links from the current edition of https://www.irs.gov/publications/p590b.)

 

[TickTock]

The IRS is currently trying to implement rules which also require annual RMDs during the 10 year period, even if your DW is under age 73/75. If those rules go into effect, your DW would have to look up her initial divisor from Table 1 (not table 3) in IRS Pub 590-B. Then each subsequent year, she would subtract 1 from that divisor. The balance would need to be distributed in year 10.

Yah. Complex, and the rules/interpretations change after the fact.

 

[pb4uski]

Another part of why I said screw it and took it all in 2024, but luckily the amount was small.

 

[FiveDriver]

10 year rule only applies to non-spousal beneficiaries.

Spousal beneficiaries have the same results for inherited IRAs as for their own contributory IRAs.

Thank you Sir. I'm going to take this as an answer to my original question about easing the tax bite on my Traditional & Rollover IRA. My DW is named as the sole Beneficiary. She will have instructions to transfer these into her own IRA, as an Eligible Designated Beneficiary. She can take RMD's per her Life Expectancy table when she reaches 73. (She's younger than I am.)

The sidebar discussion about Roth IRA's does not apply to my situation.

 

[CRLLS]

RMDs on an inherited IRA is a very complicated subject, changing almost every 6 months over the last few years. To say there is but one rule is too simplistic as SecondCor521 has shown.

In our case, DW's inherited IRA was in the mid 5 figures. Since we had a Tax liability for 2023, we used her Inherited IRA as the funding source for the IRS. Withdrawn with 100% withheld. This reduced the RMD currently required for 2024. We are looking into doing what pb4uski did and withdraw it all in 2024. Trying to plan and act on a moving target is too frustrating when the IRS has been known to change rules for a given year in late that December.

 

[TickTock]

We are looking into doing what pb4uski did and withdraw it all in 2024. Trying to plan and act on a moving target is too frustrating when the IRS has been known to change rules for a given year in late that December.

At this point we're still trying to reduce total tax liability over the remaining years. Won't take any this year (unless required by IRS) as my earned income from w*rk pushes our MAGI up. Depending on how things shake out we may just take it all in 2025 to avoid possible ACA cliff return in 2026.

 

[Wetfly93]

The way you are stating inherited IRA can be confusing. Your wife as you now know can take your IRA as her own, it will not be designated an inherited IRA. If you inherited an IRA from let’s say your mother I do not believe your wife could move that into her own IRA.

 

[CRLLS]

At this point we're still trying to reduce total tax liability over the remaining years. Won't take any this year (unless required by IRS) as my earned income from w*rk pushes our MAGI up. Depending on how things shake out we may just take it all in 2025 to avoid possible ACA cliff return in 2026.

I get the trying part. We have been successful so for. For us we have one more year before our own RMDs kick in. At that time, our own RMD's will likely be larger than the inherited IRA. We are teetering on the threshold of IRMAA as it is, a situation that I never figured would affect us. We have this year to clear it out without pushing us into higher IRMAA territory than we will likely be.

 

[athena53]

In our case, DW's inherited IRA was in the mid 5 figures. Since we had a Tax liability for 2023, we used her Inherited IRA as the funding source for the IRS. Withdrawn with 100% withheld. This reduced the RMD currently required for 2024.

Ooh, I like this! The IRA I inherited from Dad is on track to be liquidated over the required 10 years and I'm not RMD age yet, but: could I make Federal Tax installment payments from my own IRA this way? Sounds like a good way to pay the IRS and still conserve the after-tax $$ I usually pay quarterly.

ETA- Never mind- I thought about it and realized whatever I took out would still be taxable income so the withdrawal would cover the tax installment but I'd still owe additional taxes on the withdrawal amount.

 

[pb4uski]

...In our case, DW's inherited IRA was in the mid 5 figures. Since we had a Tax liability for 2023, we used her Inherited IRA as the funding source for the IRS. Withdrawn with 100% withheld. This reduced the RMD currently required for 2024. We are looking into doing what pb4uski did and withdraw it all in 2024. Trying to plan and act on a moving target is too frustrating when the IRS has been known to change rules for a given year in late that December.

And just to clarify for other readers, the IRA withdrawn with 100% withholding was done in 2023, right?