Tax rules for inherited Iras

[waynezo]

I and my 2 sisters inherited a traditional IRA from Mom(one third each) Nov 2022. I thought we had a 10 year window to withdraw and pay taxes on the money. I just read an article that said RMD's are required for each year, but penalties are waived for 2023 and that the IRS is finalizing the rules still. My investment company TRowe Price said only the 10 year window applies.

any advice will be appreciated.

 

[njhowie]

Things are in flux right now.

My guy at Fidelity told me the same when I questioned him about it a few months back - the 10-year rule applied but not the RMDs. I specifically asked him about RMD a second time, and he said as it stands, no RMD is required. However, I have found a few sources indicating that RMD is in fact required.

Because the IRS penalties are extreme with regard to RMDs if you don't withdraw enough, I'm planning to just take at least the RMD each year. No matter what, it needs to be emptied in year 10, so withdrawing some each year isn't really a big deal.

 

[GrayHare]

Those rules are in flux, and even f they weren't, Price is unreliable, so it's good you are asking here.

 

[gauss]

Originally, after the law changed, folks thought the new 10 year rule would apply to inherited IRAs with no RMDs. The IRS eventually weighed in and said that yearly RMDs would be required during the 10 year period also. The IRS may have flip/flopped on this prior to this point.

Now that we know that RMDs will be required, the IRS needs to write the full regulations on this that will handle ALL cases.

This is what we are waiting on now. Since the IRS has not finished this task, they waived RMDs for calendar years 22 and 22. They recently announced that 23 would also be waived in that the regulations are not complete yet.

For a simple case, you may be able to estimate your, now-waived, RMD for 2023, but again, not all cases have been addressed.

So in summary, RMDs are required, but there will be no penalty for not taking them in years 2021-2023 (for inherited IRAs covered by the new law)

Hope that helps a bit.

gauss

P.s. you cal look to IRS Pub 590-B 2022 for the simple case rules that would have applied in 2022/2023 had the IRS not waived them.

 

[SevenUp]

I and my 2 sisters inherited a traditional IRA from Mom(one third each) Nov 2022. I thought we had a 10 year window to withdraw and pay taxes on the money.

any advice will be appreciated.

Condolences to you and your family.

As others have noted, there currently aren't RMDs for you. Did your mom have a 2022 RMD requirement and if so did she take it?

Even if you don't have an RMD now, waiting to withdraw any of the money might put you in a higher tax bracket when you do withdraw. Withdrawing 1/n each year, where n is the number of years left, would smooth your income and might be worthwhile.

 

[Dtail]

What percentage schedule of RMD's needs to be withdrawn? Obviously, the standard RMD schedule would not satisfy the complete funds being withdrawn by year 10.

 

[Palmtree]

This is of interest to me also since my wife's father passed away this week and she is one of the benefitiaries of his IRA. I've researched the RMD requirements and it is my understanding that the IRS intends to require RMD's going forward after 2023. With the speculation that the RMD amount will be based on the age of the deceased as if they were still alive.

 

[njhowie]

With the speculation that the RMD amount will be based on the age of the deceased as if they were still alive.

I've always liked Schwab's RMD tools. I've also used their info for reference as well as it has always been on the money.

As far as inherited IRA RMD rules, they indicate that it is based on the beneficiary's age, not the deceased's.

https://content.schwab.com/ira/understand-iras/ira-calculators/inherited-rmd/

For a Non-Eligible Designated Beneficiary:

The beneficiary must withdraw a minimum amount each year beginning in the calendar year following the year of the IRA owner’s death. The annual distribution is generally based on the beneficiary’s single life expectancy, nonrecalculated.

As a Non-Eligible Designated Beneficiary, in addition to taking minimum annual withdrawals, the entire Inherited IRA must be depleted no later than December 31 of the tenth year following the IRA owner’s year of death.

Note: A distribution in the year of the IRA owner’s death must be withdrawn by the beneficiary if the IRA owner did not withdraw the RMD before death.

 

[waynezo]

Condolences to you and your family.

As others have noted, there currently aren't RMDs for you. Did your mom have a 2022 RMD requirement and if so did she take it?

Even if you don't have an RMD now, waiting to withdraw any of the money might put you in a higher tax bracket when you do withdraw. Withdrawing 1/n each year, where n is the number of years left, would smooth your income and might be worthwhile.

Yes, Mom took her 2022 RMD.

 

[badatmath]

So if the rule is "Divide the account balance at the end of 2022 by the appropriate life expectancy from Table I (Single Life Expectancy) in Appendix B.", which age am I?

The age on the date we check the balance 12/31/22? Some random day in 2023 before or after my birthday?

I think this will apply to me one day so I need to pay attention even though it is not currently an issue.

How do people keep track of when the IRS makes up its mind on such issues?

 

[njhowie]

How do people keep track of when the IRS makes up its mind on such issues?

Use Schwab's RMD calculator - you just fill everything in and it tells you.

As I mentioned above, I intend to avoid the issue entirely and simply withdraw at least the RMD amount every year and empty what remains in year 10. Then, no matter what IRS does, I'm fine - sis as well as I'm advising her to do the same.

Again, the IRS penalties for not withdrawing enough are hefty enough (50% of the difference of what should have been withdrawn) that it does not pay to have any risk here. Not worth the potential headaches of dealing with the IRS if something goes wrong or paying monetary penalties.

 

[badatmath]

Schwab didn't give me an amount. Just said 10 years.

 

[njhowie]

Schwab didn't give me an amount. Just said 10 years.

Just use the regular RMD calculator with your info:
https://www.schwab.com/ira/ira-calculators/rmd

 

[SecondCor521]

So if the rule is "Divide the account balance at the end of 2022 by the appropriate life expectancy from Table I (Single Life Expectancy) in Appendix B.", which age am I?

The age on the date we check the balance 12/31/22? Some random day in 2023 before or after my birthday?

I think this will apply to me one day so I need to pay attention even though it is not currently an issue.

How do people keep track of when the IRS makes up its mind on such issues?

It's the age you turn on your birthday in the year of the RMD.

It's probably spelled out pretty clearly in the IRS pub 590-B.

...

My understanding on this issue is that the IRS has *proposed regulations* requiring RMDs for inherited IRAs but those regulations are still only proposed. I think they have received pushback on these regulations, which is why we're in this grey area and stuck in limbo, why the regulations haven't been finalized, and why the IRS has waived RMDs for the past few years even though the current regulations still don't require them.

 

[waynezo]

I've always liked Schwab's RMD tools. I've also used their info for reference as well as it has always been on the money.

As far as inherited IRA RMD rules, they indicate that it is based on the beneficiary's age, not the deceased's.

https://content.schwab.com/ira/understand-iras/ira-calculators/inherited-rmd/

For a Non-Eligible Designated Beneficiary:

The schwab calculator is helpful. I am 62, it gives me a life expectancy of 25.4 years. The RMD would not deplete the IRA in 10 years. I will probably withdraw 10% this year and that amount each year after to satisfy the 10 year rule and keep taxes low.

 

[njhowie]

The schwab calculator is helpful. I am 62, it gives me a life expectancy of 25.4 years. The RMD would not deplete the IRA in 10 years. I will probably withdraw 10% this year and that amount each year after to satisfy the 10 year rule and keep taxes low.

Absolutely - I think that is the best plan as you won't need to worry about what may or may not happen, or when it takes effect.

 

[SevenUp]

Withdrawing 1/n each year, where n is the number of years left, would smooth your income and might be worthwhile.

I will probably withdraw 10% this year and that amount each year after to satisfy the 10 year rule and keep taxes low.

You may have to increase the percentage each year (e.g., 1/2=50% in the second to last year, and 1/1=100% in the last year) to keep withdrawal amounts approximately equal.

 

[badatmath]

I just find it hard to conceive after a few YEARS they can't write firm rules.
But good I guess if you don't need to take it might as well leave it to grow as long as possible . . . unless that means you those in limbo will have to take it over extra over the next 8 years instead? (10 total - whatever time the delay causes)? That would seem to make it worse.

 

[bobbyr]

I am dealing with inherited IRA distribution since my mom died in Dec 2022. I did 15% D this Spring.

 

[rk911]

Things are in flux right now.

My guy at Fidelity told me the same when I questioned him about it a few months back - the 10-year rule applied but not the RMDs. I specifically asked him about RMD a second time, and he said as it stands, no RMD is required. However, I have found a few sources indicating that RMD is in fact required.

Because the IRS penalties are extreme with regard to RMDs if you don't withdraw enough, I'm planning to just take at least the RMD each year. No matter what, it needs to be emptied in year 10, so withdrawing some each year isn't really a big deal.

we’re doing 1/10th, 1/9th, 1/8th, etc.

 

[Car-Guy]

Interesting but confusing thread. I had been researching this recently in case I kickoff sooner than expected and wanted to be able to help educate the DW. In ~6 more years it won't matter since she too will be RMD age. Still not sure what to tell her to do between now and then if I were to get hit by a bus (so to speak).

 

[SecondCor521]

Interesting but confusing thread. I had been researching this recently in case I kickoff sooner than expected and wanted to be able to help educate the DW. In ~6 more years it won't matter since she too will be RMD age. Still not sure what to tell her to do between now and then if I were to get hit by a bus (so to speak).

Keep in mind that the rules for spouses inheriting IRAs (your case) and the rules for children inheriting IRAs (OP's case) are distinctly different. Your wife will have options that the OP doesn't, and those options may be worthwhile considering and/or choosing.

(What your wife should do is sort of dependent on your whole financial picture. She might choose to disclaim, she might choose to keep it as inherited, or she might choose to roll it into her IRA, or something else.)