Missed Inherited IRA RMD for 2021 due to nebulous rule changes. How to handle?

Forum|Forum|3 years ago
August 6, 2022
3 replies
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It came to our attention only after filing our 2021 tax return that my wife possibly should have taken an RMD on an Inherited IRA left to her in 2021 (split equally between her and her three siblings) by her dad, who was 89 when he died in April of 2021 and, therefore, been taking distributions already. (My wife was 64 at the time of his death.) After the suspension of RMD regulations in 2020, we were not aware that the RMD regulations had gone back into effect for 2021. Nor were we clear on what my wife's RMD obligations were for the newly acquired Inherited IRA, given that "proposed regulations" on how to handle required distributions pertinent to the 2019 SECURE Act were not released until February of 2022 and are STILL unclear to tax professionals, let alone average taxpayers like myself.

Given all the above, my wife did not not take what appears to be a required RMD in 2021 for tax year 2021. Meanwhile, we had already filed out 2021 income tax return before even discovering this might be a problem. L, then, are:

1) Should she take an RMD asap for tax year 2021? If yes, do we file a From 5329 separately? Or must we file an entire 2021 amended return that includes the Form 5329? Or do we wait until filing taxes in 2022 and include both a 2022 RMD and also report the delinquent 2021 RMD together on the 2022 tax return? OR, should we wait until the IRS comes out with its final comments on the new regulations later this year, in case they waive the entire 2021 RMD requirement because of lack of clarity up to this point? Regardless of your answer, how should we handle the issue in terms of using TurboTax to resolve it? Thanks in advance for any thoughts or advice on how to proceed.

bmwermuthAuthor

Level 4

Sorry for the typo; the "L, then, are"" should read "My questions, then are: ..."

NCperson

Level 15

@bmwermuth -

1) did your father in law take RMD in the year of his death (2021). if yes, then your wife has no further 2021 RMD obligation.

2) as far as the new rules that are proposed (and expect those will be the rules), your wife will need to take RMDs EACH YEAR that liquidate the IRA in 10 years. There is a formula that calculates that annual minimum (fairly easy) , but you may need a strategy to be sure it does liquidate in a manner that doesn't force you into a high tax bracket in year 10.

3) there is no reason Turbo Tax can't handle this once the trustee generates the 1099-R.

4) have you talked to the IRA trustee on what to do about 2021?

fanfare

Level 15

unfortunately, the 5329 goes with the tax year you missed,

and the late distribution goes with the tax year you took the distribution.

Note: the IRS rule is still a proposed rule.

Notel The IRS always grants a waiver of the 50% penalty when you ask for a waiver and take timely action.

You could argue that you don't need to take a 2021 RMD because the ruling still has not been finalized, and did not exist at all in 2021.

@bmwermuth

@dmertz

fanfare

Level 15

when you are subject to the 10-year liquidation rule for newly inherited IRAs,
to spread the tax impact most evenly over the ten years,
your divisor should be : 10 - N where N is the number of annual distributions you already took.

In other words, with four years gone by, you want to take out one sixth of the IRA,

If you are a young beneficiary, this rule would generate much larger RMD than the RMD based on Pub590B formulas.

@bmwermuth

dmertz

Level 15

The RMD required to be taken for 2021 is her dad's RMD. Any portion of her dad's 2021 RMD that her dad had not taken as of his death in April 2021 must be satisfied by the beneficiaries and can be taken by the beneficiaries in any combination.

The SECURE Act only affects the beneficiary RMDs which under the proposed regulations are to be taken annually based on the Single Life Expectancy of the beneficiary in 2022, reduced by one each subsequent year and the entire inherited IRA must distributed by the end of 2031.

NCperson

Level 15

I was just finishing this when @dmertz posted:

@fanfare - assuming the IRA owners dies after the age of 72 (which occured in this case),the non-spouse beneficiaries must fulfill the same RMD obligation in the year of death. I am not aware that the proposd rules impact the RMD in the year of death. I thought that since the rules cover owners who died after 12/31/19, then it's those that passed in 2020 is where the confusion lies as it pertains to 2021 (not the year of death) RMD.

@bmwermuth - this would be a good article to read. As you state there were 4 beneficiaries, did any of them take the RMD in 2021? Remember "RMD" mean the required minimum distribution, but it can be more than that. If one of the other 3 cashed in part of their inherited IRA, that could satisfy any RMD requirement you wife may otherwise have.

https://www.irahelp.com/slottreport/year-death-rmds

The owner's 2021 RMD requirment was

1) the balance of the IRA on Dec 31, 2020

2) divided by either a) 12 if the father had his 89th birthday in 2021 or b) 11.4 if the father was to have his 90th birthday in 2021

3) equals the 2021 RMD requirment.

That RMD can be satified by the owner taking some or all of the RMD before passing OR some or any of the beneficiaries taking distributions in 2021 that equalled or exceeded 3) minus what the owner already took. So even though your wife didn't take any RMD from this inherited IRA in 2021, how about the 3 others? how about dad? did they? and did the sum of those distributions exceed 3)? that could solve your 2021 problem......

https://static.fmgsuite.com/media/documents/62a03f4e-4470-466d-ab38-c2d1850bfc7d.pdf

bmwermuthAuthor

Level 4

Thank you, NCperson, for the info regarding options for divvying up the RMD between beneficiaries in any way they'd want. We were not aware of that, so we will definitely check with the other beneficiaries to see if any took more than their quarter of the total.