IF I CASH OUT AN INHERITED IRA IN THE YEAR OF DEATH, DOES THAT COVER THE BALANCE DUE OF THE RMD FOR THAT YEAR?

[Bsch4477]

Since the amount of a RMD is based on a percentage of the total amount in the account, withdrawing the entire amount would certainly cover the RMD. 

[dfschmagel]

THIS SEEMS TO BE A GRAY AREA.  THE UNPAID RMD FOR A DECEASED IRA OWNER BECOMES THE LIABILITY OF THE BENEFICIARY WHO HAS OPENED AN INHERITED IRA.  THAT POINT IS CLEAR. BUT SOME SOURCES SAY THAT EVEN IF THE IINHERITED IRA IS CASHED OUT, TAX ON THE UNPAID RMD IS STILL REQUIRED TO BE PAID IN ADDITION TO THE TAX ON THE TOTAL LIQUIDATION. SOUNDS LIKE DOUBLE TAXATION. I HAVE SEARCHED THROUGH IRS GUIDELINE AND BOOKLETS TO NO AVAIL. AND THE IRS SEARCH ENGINE IS ABYSMAL  GOOGLE AI GIVES CONFLICTING ANSWERS DEPENDING ON HOW THE QUESTION IS POSED. NO ONE CAN REFERENCE BACK TO A IRS RULE OR OPINION ON THIS.

[NCperson]

@dfschmagel you are over thinking it.  

Let's say the IRA balance was $200,000 on Dec. 31, 2024 and the RMD for 2025 was $9,000.   That means that in 2025, the RMD owner must distribute AT LEAST $9,000.  (Remember, RMD stands for required MINIMUM distribution.)    The IRA owners passes without taking the RMD.  The beneficiary owner liquidates the entire IRA.  Well, you distributed AT LEAST $9,000, didn't you? 😉

there is nothing gray about it. 

[dmertz]

There is no grey area.  The IRS has provided unambiguous guidance on this issue.  Even if investment losses cause the balance to drop below the RMD amount before the RMD is completed, taking in the year-of-death a distribution of the entire balance of the inherited IRA satisfies the RMD requirement unless the remainder can be taken from another inherited IRA that is permitted to be aggregated.  (Aggregation is permitted with multiple IRAs inherited by the same beneficiary from the same individual and subject to the same RMD-determination method).

[SteamTrain]

@dmertz 

I think the OP's underlying question to this is how the $$ are to be allocated at tax time.

i.e. Does the RMD value get allocated to just the Deceased person's final tax return and only the remainder to the beneficiary?

....or if rules allow it, can it all just be allocated to the beneficiary?

___________________

If allocated separately, will/should one, or two separate 1099-R's be issued?

[dfschmagel]

CAN YOU PROVIDE A SPECIFIC UNAMBIGUOUS IRS GUIDELINE OR CITATION THAT ADDRESSES THIS? I COULD NOT FIND ANY SPECIFIC GUIDANCE.  I AGREE WITH YOUR ASSESSMENT, BUT AS I HAVE SAID, THERE ARE NUMEROUS ARTICLES BY CPA'S AND ADVISORS THAT SAY THE RMD MUST BE SATISFIED BY THE INHERITOR, EVEN IF THE IRA IS CASHED OUT. AND THEY INFER THAT THE 25% PENALTY MAY APPLY IF THE RMD IS NOT TAKEN. THE RMD BECOMES THE RESPONSIBILITY OF THE INHERITOR AND IS NOT TO BE REPORTED ON THE FINAL RETURN OF THE ORIGINAL IRA OWNER.

[NCperson]

@dfschmagel - first, please turn off the cap lock.... it is hard to read and etiquette says it is a form of SHOUTING. 

What you state is accurate and correct.  

Since your father passed and did not take his RMD, the responsility passes to the Inheritor.  

"If the owner died on or after the required beginning date, the IRA beneficiaries are responsible for figuring and distributing the owner's required minimum distribution in the year of death."

Page 8 of this link 

https://www.irs.gov/pub/irs-pdf/p590b.pdf

SInce you took the RMD after it was already transferred to your name and you SSN, it goes on YOUR tax return.  

if you took out more money from the IRA than the RMD required, you have met the RMD requirement.  THat is just simple logic.  Remember, RMD stands for "required minimum distribution' and since your distribution exceeded that minimum, what is the issue? 

Can you please provide links to the artciles you state are conflicting? 

Now all that stated, I suspect all these articles are saying that the RMD requirement is an obligation as of Jan 1.  So the IRS doesn't care whether a) the owner of the IRA distrubutes the RMD prior to their passing or b) the  beneficary takes the RMD after their passing; in fact, you have until the end of the following year to take that RMD without penalty if this was the circumstance.   

I think you are using the incorrect terminology when you state you "liquidated"  or "cashed out" the account".  What you did was take a distribution that liquidated the account and then once the balance was zero you closed the account.  The IRS lanugage is consistently "distribution"...and you did that.   

[Opus 17]

It's very straightforward.  An RMD is not a special withdrawal or special procedure.  It is simply the minimum amount you must withdraw under the regulations.  You can always withdraw more.

Suppose the owner has an RMD of $5000.  That would be satisfied if they made a withdrawal of $5000 on December 29.  But it would also be satisfied if they withdrew $30,000 in March to buy a car, or if they withdrew $500/month over the year for regular living expenses.

Suppose the owner's RMD in your case was $5,000 and the total balance was $50,000.  You should consider that you withdrew the $5,000 RMD, plus an additional $45,000.  No problem.

This is only important because there are things you can't do with the RMD portion (like contribute it to a new IRA in your name).  But you can do those things with the other portion.  So if Turbotax knows that $5000 was the RMD portion and $45,000 was just a withdrawal, it will check to make sure that any other transactions are covered by your other earnings or the other withdrawal, and not the RMD.  

[NCperson]

@dfschmagel - now that is THREE responses stating this is very straight forward!  

[dmertz · Accepted solution]

Responsibility to complete the year-of-death RMD transfers to the beneficiary(s) upon the death of the IRA participant.  The result is that whatever portion of the year-of-death RMD was completed by the participant before death goes on the participant's final tax return and is the only portion that the decedent was required to complete.  No Form 5329 Part IX is ever to be included with the decedent's final tax return.  The remainder of the year-of-death RMD that is completed by the beneficiary(s) goes on the beneficiary(s) tax return(s).

The responsibility of the beneficiary(s) to complete the remainder of the year-of-death RMD is addressed in CFR 1.401(a)(9)-5(d)(1)(i):  https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44...

Regarding whether a complete distribution of the inherited IRA(s) satisfies the RMD, the point of RMDs is to prohibit excess accumulation in the IRA(s).  With nothing left in the IRA(s) after a full distribution, there is no accumulation and therefore no excess accumulation, so the requirement has been satisfied.  Although I doubt that it applies in this situation, that holds even if, due to investment losses, the total amount distributed during the year to the participant and the beneficiary(s) combined is less than the RMD calculated from the previous year's year-end balance.  In that case you can either simply report as the required amount the amount actually distributed, or, if you enter a higher required amount based on the calculation from the previous year's year-end balance, resulting the Form 5329 Part IX being included in your tax return, you can request a penalty waiver on the portion not taken due to reasonable cause, the reasonable cause being that there is nothing left to distribute.