Inherited IRA 2020 -did I miss rmd

[Fldavem1]

My parent died in late 2020. I inherited an IRA I either inherited it in late December 2020 or early 2021. I was under the impression that it was that point subject to the 10 year rule, but I was not subject to RMD’s based on, my life expectancy or anything else. They had already begun taking RMD’s did I miss taking required minimum distributions? 

Thanks in advance

[Critter-3]

If the parent was taking RMDs then you must also take them but you also must deplete the account within 10 years in some fashion.   So the custodian is correct.

[Fldavem1]

So I’m going to need to take a back-RMD for 2022 AND pay a fine?

Follow up question: the RMD is based on the IRS table for my age (60) correct?

[Critter-3]

Talk to the IRA custodian. 

[dmertz]

Because your parent died in 2020, you inherited the account in 2020.

Due to the effects of COVID on the economy, RMDs for 2020 were waived.

You are subject to the 10-year rule, requiring that the IRA be completely drained by the end of 2030.

Because your parent died after their required beginning date for RMDs, you are also required to take annual RMDs based on your life expectancy.   However, due to conflicting information provided by the IRS prior to March 2022, the IRS has waived the penalty for failing to take beneficiary RMDs for 2021 and 2022 for those subject to the 10-year rule.  Your life-expectancy factor is from the Single Life Expectancy table based on your age in 2021, reduced by 1 for each subsequent year, so if you were age 58 on your birthday in 2021, your life-expectancy factor for 2021 was 28.9, so the factor for 2023 would be 26.9.  (If you were instead age 60 in 2021, your life-expectancy factor for 2021 was 27.1, making the factor for 2023 be 25.1.) 

The IRA custodian might be able to calculate your beneficiary RMD, but they are not required to do so even if you ask.

[NCperson]

@Fldavem1 

<<so I’m going to need to take a back-RMD for 2022 AND pay a fine?>>

while there is no penalty as explained above, that also means there is no incentive to amend and take a  2022 RMD.. (in fact if you were to call the custodian today and try to do so, it would be reported as part of 2023 in any event). 

So you are 'in the clear' for 2021 and 2022.... just have to begin taking RMD's in 2023 and have 8 years to do so (last one in 2030 to liqudate the account).

Best to come up with a strategy to spread out these RMDs based on your own  personal situation.  Since you are just 60 now, you may not be familiar with IRMAA which is a "stealth tax" added to your Medicare premiums and is based on your income.  Your income could increase significantly in the last 3 years (age 65) as you attempt to liquidate the inherited IRA.    If you don't have the right strategy over the next 5  years, that can increase your Medicare premiums for a few years.

Remember it's a required MIMIMUM distribution requirement; it's not a required MAXIMUM distribution requirement. 

Also, the additional income from the IRA distrributions could also cause more of your social security to be taxable

Taking more out beyond the minimum requirement in the early years can limit hitting IRMAA and reduce how much of social security is taxable.  it simply takes some planning and thought.  EVeryone's situation is unique. 

this is a good website that explains IRMAA and its implications.  

https://thefinancebuff.com/medicare-irmaa-income-brackets.html

[Fldavem1]

So now I went to look at the RMD life expectancy schedule and came across the following, which is what originally made me think I didn’t need RMDs but just to deplete the account within 10y. Again, I’m not generally of RMD age (60) but they were:

https://www.irs.gov/publications/p590b#en_US_2022_publink100090130

10-year rule.

The 10-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner’s death. For example, if the owner died in 2022, the beneficiary would have to fully distribute the IRA by December 31, 2032. The beneficiary is allowed, but not required, to take distributions prior to that date.

So I don’t need to take RMD? Just seeing conflicting information! Very confused.

[NCperson]

@Fldavem1 might be easier to read in the PDF as the layout is easier to follow. 

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

the fact that you are 60 and not required to take RMDs on YOUR IRA is immaterial to the rules for inherited IRAs.

The fact that your parent was required to take RMDs means you also have to take RMDs on the INHERITED IRA.  If your parent was NOT required to take RMDs, then you aren't either for the inherited IRA.  In both cases, the INHERITED IRA still needs to be liquidated within 10 years. 

read beginning on page 10 

the passage you quote discusses those that are NOT taking life expectancy payments (i.e. not reaquired to continue to take RMDs) but you ARE required to take life expectancy payments because your parent was required to take RMDs. 

[dmertz]

This information in 2022 IRS Pub 590-B is not current (or is at least incomplete and confusing) with respect to the proposed regulations that the IRS is now following and is largely the reason that the penalty for not taking RMDs under the 10-year rule by those required to do so was waived for 2021 and 2022.  The revised regulations require you to take annual RMDs under the 10-year rule because your parent died after their required beginning date for RMDs.

As NCPerson said, it likely makes sense to take more than the required RMD each year to avoid a big tax hit in year 10 when any remaining amount must be distributed but you'll need to evaluate that based on your personal tax situation.  Also, tax rates are scheduled to increase back to their previous levels in 2026, so it might be advantageous to make larger distributions now rather than later.

[fanfare]

If you are not on social security, and therefore don't have to worry about IRMAA --

When you are subject to the 10-year liquidation rule for newly inherited Traditional IRAs,
to spread the tax impact most evenly over the ten years,
your divisor should be :   10 - N where N is the number of entire anniversary years gone by.

In other words, with four years gone by, you want to take out one sixth of the IRA in the fifth anniversary year.
If you are a young beneficiary, or even not so young, this rule would generate much larger RMD than the RMD based on Pub590B formulas.

At a very high age, the Pub590B formula can overtake this calculation and require a larger RMD.

If the IRA is huge enough, there's nothing you can do about IRMAA.

[NCperson]

with planning - and taking more of the RMD prior to getting on Medicare, it can reduce the IRMAA tranche you are eventually in.... as I noted above, it takes planning and thought, so there are things you can do about it.  

Further, while I agree that directionally something like 1/10, 1/9, 1/8 per year makes sense;  that approach and 10 smooth payments would infer no gains on the investment.

For example, and this is where the planning and thought has to come into play.  A 5% return on investment would mean the distribution at the end of each year would need to be something like the chart below, which is more aggressive in the early years than a simple 1/10, 1/9, etc.  Then the distributions are smooth each year.  

And then someone may want to be even more aggressive to get to the top of a particular tax bracket.  It is complicated and not for the faint of heart. 

1	13%
2	14%
3	16%
4	17%
5	20%
6	23%
7	29%
8	37%
9	55%
10	100%

[fanfare]

the formula I posted for the divisor takes into account any gains or losses that you are able to achieve.

@NCperson