Two Inherited IRA Questions

[marko]

I've been managing my brother's finances (and life in general) since his disability 8 years ago. I'm his legal guardian and conservator.

He has a small non spousal IRA from his late girlfriend currently worth about $200k and has 5 more years to clear it out. He'll also be 73 in two years and will need to address his own RMD then.

Question: Would RMD apply to his inherited IRA at age 73 or is it under different rules?

Question: I've been making smallish withdrawals for him from the inherited, trying to keep his income under a certain level. Would I be better to make just one big clear-out withdrawal from the inherited, have one bad tax year and be done with it? The small withdrawals ($20k-$30k) aren't lowering the balance fast enough against the growth. Larger withdrawals over 4 or 5 years lessens the pain but puts him in a higher income which limits a lot of his benefits.

I know that inherited IRAs have different rules for the disabled but the administrators never know what I'm talking about on that subject and claiming such seems like more of a paperwork hassle than it's worth. Either way his lower income status will change in the next few years.

I'm leaning toward one bad tax year, let him freak out over the tax bill and move on. I also need to start simplifying things in general as I'm getting older and don't want to leave someone else with more complications than necessary.

Any insight welcome.

 

[marko]

Mods can you change the title to Two Inherited IRA Questions? I distilled the post

 

[braumeister]

Changed.
But you can usually get a mod's attention quickest by reporting a post.

 

[cathy63]

Question: Would RMD apply to his inherited IRA at age 73 or is it under different rules?

When did he inherit this IRA -- before 1/1/2020 or after?

If before 2020, then he can stretch the IRA over his lifetime. He had to start taking RMDs in the year after her death even if he wasn't 73 yet.

If after 1/1/2020, then if he was older than his girlfriend or less than 10 years younger than her, then he's an eligible designated beneficiary and he can stretch the IRA over his lifetime. He had to start taking RMDs in the year after her death even if he wasn't 73 yet.

If after 1/1/2020 and before 1/1/2024 and he does not meet the age test, then it's too late for him to use the disability test, so you can stop worrying about that rule. The deadline for submitting proof of disability was 10/31 of the year after the girlfriend's death. In this case, he has to start taking RMDs in 2025 even if he will not be 73 yet and he also has to empty the account within 10 years of her date of death.

For RMDs on an inherited IRA, you do a different calculation than for your own IRA. Hopefully he meets one of the stretch tests and you've already taken enough every year to account for any past RMDs he had to take.

I've been making smallish withdrawals for him from the inherited, trying to keep his income under a certain level. Would I be better to make just one big clear-out withdrawal from the inherited, have one bad tax year and be done with it? The small withdrawals ($20k-$30k) aren't lowering the balance fast enough against the growth. Larger withdrawals over 4 or 5 years lessens the pain but puts him in a higher income which limits a lot of his benefits.

Figure out how much income he's actually going to get from the inherited IRA. I don't think the RMDs are as big as you think they are.

If he inherited the IRA in 2018 before the rules changed in 2020 (that's a guess based on what you said in your OP):
Then he had to take 1/20.2 of the balance in 2019 when he was age 66. If the IRA was worth $200K then, he had to take $9901.
At age 67 he would have taken 1/19.2 which, if it grew back to $200K would have been $10417.
At age 68, it was 1/18.2 and assuming the same balance, the withdrawal should have been $10989.
At age 69, in 2022, the IRS changed the single life tables so his new divisor would have been 19 and his RMD was $10526.
At age 70, in 2023, it was 1/18 and $11,111.
At age 71, this year, it is 1/17 and $11,764.

The divisor will keep going down by 1 every year until he has to empty the account 16 years from now when he's 87. These RMDs are pretty small, smaller than the amounts you say you've been taking, and won't get really large until about 10 years from now.

I think, if the situation is as I outlined here, you could keep taking the RMD plus some extra from the inherited account until he reaches age 73. At that point you can cut back to take just the RMD from both accounts and if extra is needed take it from the inherited account.

 

[Healthy Lifestyle]

I am trying to follow this?

 

[kite_rider]

So glad you brought this topic up again for clarity. So is the OP able to do the 'stretch' RMD because he inherited the IRA prior to 2020 and not because of his disability (which could have enabled the 'stretch' rules by making him an EDB).

An article from Kitces.com was referenced previously and I've been trying to make sense of it for a while now. It does have some helpful flow charts, but I guess this chart only applies to IRA's inherited after 2020. Right?

 

[all4j]

There might be a few other considerations besides taxes. Is there a possible need to consider creditor protection? Hopefully, there is a successor beneficiary on the inherited ira now. Moving from the IRA into a taxable account moves the $s from that successor beneficiary to the estate beneficiary if different. If those beneficiaries are different, is that a concern?

 

[Exchme]

I'm leaning toward one bad tax year, let him freak out over the tax bill and move on.

If not for the low income benefits, you should be trying to level out the RMDs between his accounts so his income doesn't spike to high brackets in later years. However, if the low income benefits are substantial, getting those the next two years before his own RMDs kick in may govern.

Unless his own RMDs will be really large, I don't see a case where making a single huge withdrawal from the inherited account makes sense - he loses benefits, pays a high tax rate to get the money out and then incurs tax drag in taxable forever after.

The small withdrawals ($20k-$30k) aren't lowering the balance fast enough against the growth.

The inherited account should be where you preferentially put his bonds to slow its growth as it has the least attractive RMD requirements. Remaining bonds preferentially should go in his own IRA. Taxable/Roth should be loaded with his stocks to minimize tax drag.

 

[FREE866]

Following

 

[marko]

When did he inherit this IRA -- before 1/1/2020 or after?

If before 2020, then he can stretch the IRA over his lifetime. He had to start taking RMDs in the year after her death even if he wasn't 73 yet.

If after 1/1/2020, then if he was older than his girlfriend or less than 10 years younger than her, then he's an eligible designated beneficiary and he can stretch the IRA over his lifetime. He had to start taking RMDs in the year after her death even if he wasn't 73 yet.

If after 1/1/2020 and before 1/1/2024 and he does not meet the age test, then it's too late for him to use the disability test, so you can stop worrying about that rule. The deadline for submitting proof of disability was 10/31 of the year after the girlfriend's death. In this case, he has to start taking RMDs in 2025 even if he will not be 73 yet and he also has to empty the account within 10 years of her date of death.

For RMDs on an inherited IRA, you do a different calculation than for your own IRA. Hopefully he meets one of the stretch tests and you've already taken enough every year to account for any past RMDs he had to take.


Figure out how much income he's actually going to get from the inherited IRA. I don't think the RMDs are as big as you think they are.

I think, if the situation is as I outlined here, you could keep taking the RMD plus some extra from the inherited account until he reaches age 73. At that point you can cut back to take just the RMD from both accounts and if extra is needed take it from the inherited account.

Cathy63, you always come through!

His girlfriend died on Jan 18, 2020 and he inherited it around March of that year.. He was younger than her by a year or so and didn't start making any withdrawals until 2023.

So if I read you correctly, he's in the case where he has five more years to empty the account. Which brings me back to whether I should just do it all now/soon and be done with it.

As noted, there's another motivation: I may have a personal health issue of my own coming up (won't know for another month) and I'm thinking of simplifying things in case someone else has to take over in the years ahead. His income based benefits are nice but not a game changer were he to lose them.

For the record, he doesn't-- and never will-- need the money, even in a LTC situation so I'm not trying to save a few bucks on taxes, but rather make things clearer and cleaner.

I'm getting a headache but truly appreciate the inputs so far!

 

[cathy63]

So glad you brought this topic up again for clarity. So is the OP able to do the 'stretch' RMD because he inherited the IRA prior to 2020 and not because of his disability (which could have enabled the 'stretch' rules by making him an EDB).

If he inherited the IRA before 2020, then he can stretch the distributions under the rules that were in effect at that time. Anybody could stretch then.

If he inherited in 2020 or later, then he had until October 31 of the year after the inheritance to document his disability. It sounds like he didn't do that, so he can't use this provision of the SECURE Act to say he's an EDB.

If he inherited in 2020 or later, and he meets the 10-yr age difference test, then he can use that provision of the SECURE Act to say he's an EDB. I don't think there's a time limit for using this one.

An article from Kitces.com was referenced previously and I've been trying to make sense of it for a while now. It does have some helpful flow charts, but I guess this chart only applies to IRA's inherited after 2020. Right?

Yes, that chart is for after the SECURE Act went into effect on 1/1/2020.

The main point I was trying to make is that he has to take RMDs even though he's not 73, and he probably had to be taking them all along. It's worrying that he hasn't been taking them, though it sounds like the withdrawals have been larger than the RMDs anyway.

 

[marko]

There might be a few other considerations besides taxes. Is there a possible need to consider creditor protection? Hopefully, there is a successor beneficiary on the inherited ira now. Moving from the IRA into a taxable account moves the $s from that successor beneficiary to the estate beneficiary if different. If those beneficiaries are different, is that a concern?

Interesting point but no. Beneficiaries are the same and his estate is all spelled out in various trusts.

 

[marko]

If he inherited the IRA before 2020, then he can stretch the distributions under the rules that were in effect at that time. Anybody could stretch then.

If he inherited in 2020 or later, then he had until October 31 of the year after the inheritance to document his disability. It sounds like he didn't do that, so he can't use this provision of the SECURE Act to say he's an EDB.

If he inherited in 2020 or later, and he meets the 10-yr age difference test, then he can use that provision of the SECURE Act to say he's an EDB. I don't think there's a time limit for using this one.

Yes, that chart is for after the SECURE Act went into effect on 1/1/2020.

The main point I was trying to make is that he has to take RMDs even though he's not 73, and he probably had to be taking them all along. It's worrying that he hasn't been taking them, though it sounds like the withdrawals have been larger than the RMDs anyway.

Yes his withdrawals have been larger than his RMDs.

 

[cathy63]

His girlfriend died on Jan 18, 2020 and he inherited it around March of that year.. He was younger than her by a year or so and didn't start making any withdrawals until 2023.

OK, so he is an eligible designated beneficiary and he could stretch the RMDs over his lifetime, using the rough calcs I gave you in my previous response. But ... to do that he had to take the RMDs in 2021 and 2022. Since he didn't do that, he either has to

1. decide that he's on the 10 year plan and he will empty the account by 2030 and he will also take RMDs starting in 2025.
2. go back and take the missed RMDs and pay the penalties. You need a professional tax preparer to help with this.

For the record, he doesn't-- and never will-- need the money, even in a LTC situation so I'm not trying to save a few bucks on taxes, but rather make things clearer and cleaner.

If you have someone helping you with his taxes every year, then taking the RMDs and paying taxes on them is not particularly complex. You could even print out this thread and provide it to the person who does the paperwork for you.

If you're trying to figure it out yourself without professional help, then the handling of the RMDs does seem to be an issue. In that case, I would say things will be easier for you to empty the IRA now or in 2025 and just avoid the RMDs on the inherited IRA altogether.

 

[marko]

OK, so he is an eligible designated beneficiary and he could stretch the RMDs over his lifetime, using the rough calcs I gave you in my previous response. But ... to do that he had to take the RMDs in 2021 and 2022. Since he didn't do that, he either has to

1. decide that he's on the 10 year plan and he will empty the account by 2030 and he will also take RMDs starting in 2025.
2. go back and take the missed RMDs and pay the penalties. You need a professional tax preparer to help with this.

If you have someone helping you with his taxes every year, then taking the RMDs and paying taxes on them is not particularly complex. You could even print out this thread and provide it to the person who does the paperwork for you.

If you're trying to figure it out yourself without professional help, then the handling of the RMDs does seem to be an issue. In that case, I would say things will be easier for you to empty the IRA now or in 2025 and just avoid the RMDs on the inherited IRA altogether.

Thank you Cathy63! This is what i was looking for. Very grateful as always. My plan is to wait and see next month if I'm OK healthwise and head one way or the other.

 

[orbops]

I have an inherited IRA from my sister who passed away in 2019, so I am able to stretch the RMD indefinitely. My plan in the future is to use the Safe Harbor rule to pay all my taxes from the yearly RMD, so that may be a consideration for using the stretch option.

Since he will be 73 in 2 years, then he was 67 in 2020. Using Table 1 of Pub 590B gives a life expectancy value of 21.2. To calculate the RMD each year (Publication 590-B (2023), Distributions from Individual Retirement Arrangements (IRAs) | Internal Revenue Service), you'll take the value of the inherited IRA on 12/31/2019, and divide it by the 21.2. In subsequent years, the life expectancy value is reduced by 1.0 each year and you'll use the value of the Inherited IRA on 12/31 of each subsequent year divided by the reduced life expectancy value.

It would be a worthwhile exercise to estimate which tax bracket he'll be in with a yearly RMD vs one huge RMD, and then adding in his own RMD when he turns 73. That way, you'll have a heads up on any potential Medicare monthly premium increases due to the RMDs.

 

[hotwired]

When did he inherit this IRA -- before 1/1/2020 or after?

If before 2020, then he can stretch the IRA over his lifetime. He had to start taking RMDs in the year after her death even if he wasn't 73 yet.

If after 1/1/2020, then if he was older than his girlfriend or less than 10 years younger than her, then he's an eligible designated beneficiary and he can stretch the IRA over his lifetime. He had to start taking RMDs in the year after her death even if he wasn't 73 yet.

If after 1/1/2020 and before 1/1/2024 and he does not meet the age test, then it's too late for him to use the disability test, so you can stop worrying about that rule. The deadline for submitting proof of disability was 10/31 of the year after the girlfriend's death. In this case, he has to start taking RMDs in 2025 even if he will not be 73 yet and he also has to empty the account within 10 years of her date of death.

For RMDs on an inherited IRA, you do a different calculation than for your own IRA. Hopefully he meets one of the stretch tests and you've already taken enough every year to account for any past RMDs he had to take.


Figure out how much income he's actually going to get from the inherited IRA. I don't think the RMDs are as big as you think they are.

If he inherited the IRA in 2018 before the rules changed in 2020 (that's a guess based on what you said in your OP):
Then he had to take 1/20.2 of the balance in 2019 when he was age 66. If the IRA was worth $200K then, he had to take $9901.
At age 67 he would have taken 1/19.2 which, if it grew back to $200K would have been $10417.
At age 68, it was 1/18.2 and assuming the same balance, the withdrawal should have been $10989.
At age 69, in 2022, the IRS changed the single life tables so his new divisor would have been 19 and his RMD was $10526.
At age 70, in 2023, it was 1/18 and $11,111.
At age 71, this year, it is 1/17 and $11,764.

The divisor will keep going down by 1 every year until he has to empty the account 16 years from now when he's 87. These RMDs are pretty small, smaller than the amounts you say you've been taking, and won't get really large until about 10 years from now.

I think, if the situation is as I outlined here, you could keep taking the RMD plus some extra from the inherited account until he reaches age 73. At that point you can cut back to take just the RMD from both accounts and if extra is needed take it from the inherited account.

I'm flabbergasted and duly impressed not only by how globally you understand the topic but how well you explain it. Technically and in layman terms at the same time. Great job and a hat tip to you.

 

[marko]

I'm flabbergasted and duly impressed not only by how globally you understand the topic but how well you explain it. Technically and in layman terms at the same time. Great job and a hat tip to you.

+1. Not only that, but over the years @cathy63 has been able able to somehow figure out what some poorly worded questions (mostly from myself) are actually asking.

 

[yclipse]

An article from Kitces.com was referenced previously and I've been trying to make sense of it for a while now. It does have some helpful flow charts, but I guess this chart only applies to IRA's inherited after 2020. Right?

View attachment 52953

I have one difference with the Kitces diagram, with all respect to their undoubted expertise. I believe that the rule for a NEDB when the decedent died on or after his RBD requires using the decedent's life expectancy. The recent Final Rule confirmed that the IRS will be applying the "at least as rapidly" statutory language in that case, which rules out using the DB's LE if longer.