Inherited IRA RMD calcs

[mike the wino]

I am a Nonspouse – Noneligible Designated Beneficiary of an IRA that I inherited in 2022. The original owner died in 2022 (born in 1932), and had taken that year's RMD. I was born in 1959. As such, this IRA is subject to the 10-year rule. Last year I took a withdrawal (considered a RMD) of approximately 20% of the balance, and am looking to determine the RMD for 2024. I have found several Inherited IRA RMD calculators, and each of them has produced the same result which is considerably less than 10% of the balance from the end of 2023.

For the purpose of this question, let's assume the following numbers:

Amount inherited from original owner's IRA: $100,000

Balance at end of 2023 after the distribution: $80,000

Today's balance: Approx $88000

RMD for 2024 taken from calculator(s): Approx $3500

Here's my conundrum. Do the annual RMD's increase on a yearly basis in order to deplete the account by the required year, in this case 2032? Or do the RMD's stay the same for years 2 through 10, and then I'd just have a large balance to deplete in 2032? As noted above, the RMD for 2024 is calculated to be about $3500. Due to the nature of the funds it is invested in, the year end balance (currently) increased about 10% which is more than double the (current) RMD. If that trend continues, and unless the RMD's start increasing, the balance in 2032 will be higher than it is now. Is that how this really works? And if so, won't that final withdrawal of funds all be taxable in 2032?

[Opus 17]

The RMD is based on your life expectancy.  Use table 1 in appendix B of publication 590-B.   You should be age 65 in 2024, so your life expectancy is 22.9 years.  That means you need to withdraw at least 1/22.9th (or 4.37%) of the account.  Next year when you are 66, your life expectancy would be 22.0 years, and you would be required to withdraw 4.55% of the account.

RMDs are designed to increase over time as your life expectancy shortens, so the account holder uses up the account around the time they die.  It's intended to discourage/prevent passing a huge tax-free account to the heirs.  You kind of short-circuit that expectation, because the 10 year rule means you won't even get close to withdrawing all the money by the end of the 10 years, if you only take RMDs.  But that's how the RMD calculation works, whether you are the original owner or the heir.

You may want to withdraw more than the RMD anyway, because if you wait until 2032 when you have to withdraw it all, it might put you in a higher tax bracket.

[dmertz]

Opus 17 uses the wrong life-expectancy factor.  The factor to be used is based on your age in 2023 (age 64, LE factor 23.7), with that factor reduced by one for each year after 2023.  That means that the factor for 2024 is 22.7, not 22.9.  With a 2023 year-end balance of $80,000, the RMD for 2024 would be $80,000 / 22.7 = $3,524.23

"Do the annual RMD's increase on a yearly basis in order to deplete the account by the required year, in this case 2032?"

No.

"Or do the RMD's stay the same for years 2 through 10, and then I'd just have a large balance to deplete in 2032?"

Yes.  However, the RMD is the minimum amount required to be distributed each year.  To level out the distributions you might consider taking out more than the minimum each year to avoid having a large distribution in year 10.  For example, you might take:

2024  $80,000 / 9 = 8.888.89

2025  2024 YE balance / 8

2026  2025 YE balance / 7

2027  2026 YE balance / 6

2028  2027 YE balance / 5

2029  2028 YE balance / 4

2030  2029 YE balance / 3

2031  2030 YE balance / 2

2032  all that remains

Of course you could adjust that down or up in years that you have more or less other income than you typically do.  You might also taking out more than the minimum to be able to move the funds to capital investments outside of the IRA where subsequent gains can enjoy taxation at long-term capital gains rates instead of being taxed as ordinary income.

[mike the wino]

Thank you for the detailed response, Opus! I kind of figured that was the deal, but your explanation made it really clear for me.

Many thanks.

[mike the wino]

Thank you as well, dmertz! You've given me some good things to consider.

That's what I like about this Community...detailed and easy to understand advice/answers from SMEs.