Inherited IRA Question

[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.

 

[jpeter1093]

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.

 

[badatmath]

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.

 

[GalaxyBoy]

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.

 

[rk911]

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.

 

[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.

 

[ProGolferWannabe]

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.