My dad had a traditional IRA with an investment firm. After he passed, the firm created an IRA in my name as a vehicle to process this account. I am being told that their is an IRS stipulation that says I have 10 years to liquidate (the 10 year rule). I am looking for clarification on this. Also, I was hoping to roll this into my own personal IRA but was told I cannot, because of the 10 year rule. Is there any way around this? I don't understand these limitations imposed on inherited monies.
Based on the information you provided, it sounds like you are considered a Designated Beneficiary by the IRS. Generally, designated beneficiaries must follow the 10-year rule:
From the IRS:
10-year rule: If a beneficiary is subject to the 10-year rule,
The IRS has a breakdown of the treatment of inherited IRAs here: Retirement topics - Beneficiary
The reason for these limitations is that traditional IRAs/retirement accounts are funded with pre-tax funds, or said in another way, funds that have never been taxed. Unfortunately, there is no way around this requirement.
How is "designated beneficiary" defined? Myself and two siblings were the three listed beneficiaries.
Designated beneficiaries are those who are not "eligible designated beneficiaries".
Eligible Designated Beneficiaries are:
This is per IRS regulations: Retirement topics - Beneficiary
You can't comingle Inherited IRAs and your own IRAs.
Your Congress changed the law on Inherited IRAs to blow up the "Stretch IRA". Many feel this is confiscatory.
If your father had reached an age where RMDs were required, then you also are required to take RMDs each year until you close out the Inherited IRA.
I inherited a IRA in 2007 from my father. He was making rmds, being that he reached the age. I made an initial withdrawal in 2007 and then I left the IRA in Fidelity forgetting about it, until speaking with Fidelity today about another matter, and they mentioned it. The advisor told me to find an estate CPA but I thought I would ask here. So it has been sitting for 17 years, and has about quadrupled in value. My question is, what amount should I withdraw for this year, and is there any way to not be charged with penalties? I didn't know it had to be closed out in a relatively short time back then.
@ProbablyMike wrote:
I inherited a IRA in 2007 from my father. He was making rmds, being that he reached the age. I made an initial withdrawal in 2007 and then I left the IRA in Fidelity forgetting about it, until speaking with Fidelity today about another matter, and they mentioned it. The advisor told me to find an estate CPA but I thought I would ask here. So it has been sitting for 17 years, and has about quadrupled in value. My question is, what amount should I withdraw for this year, and is there any way to not be charged with penalties? I didn't know it had to be closed out in a relatively short time back then.
It would be better if you posted a new question instead of adding to a topic that is stale and has different facts.
However, I will ask someone who knows @dmertz
For the rules in place in 2007, you had two options. Either withdraw all the money and close the account in 5 years, or keep the account by making life expectancy withdrawals (RMDs) based on your age when your father died. You have therefore missed 17 years of RMDs, the official penalty for most of the years in question is 50% of the missed amount (for each year). I think, but am not sure, that what you need to do now is make a whopping big withdrawal, equal or more than all the RMDs you missed, and attach a request for penalty forgiveness to your tax return. It certainly is time to consider professional assistance. But perhaps my colleague will have a better perspective.
Going forward, you certainly need to start taking RMDs. And, the RMDs from this inherited IRA are separate from and calculated differently than the RMDs for any personally owned IRAs you have. You can't combine the RMD requirement for an inverted IRA and your own IRA.
Thank you for your response. I was looking for answers and this thread was so similar I just added my Q. I should have posted a new entry.
This is the only IRA I have. I was thinking maybe withdraw all of it, about 250K, and move it to another Fidelity mutual fund. I will be crying at tax time for 2025. I wonder what the tax plus penalty would add up to for the 250K withdrawal. Currently I am in the 12% income tax level.
The 10 year rule does not apply to an IRA inherited in 2007.
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Each RMD is calculated separately.
For year N, it depends on the year end value on Dec31 of the prior year (N -1),
and the divisor assigned to year N.
So you need the Dec31 value of the account for all those years.
Did you keep the statements or just throw them away ??
"I was thinking maybe withdraw all of it, about 250K,"
This is one approach, where you hope the IRS does not notice all the RMDs that you missed.
I never received statements, but I keep a spread sheet. I have all the Dec 31st values except for 2014, 2015 and 2016 because my hard drive crashed in 2016 and I had not backed up any files for a few years.
So the RMD is the difference between two adjacent years and divided by what?
So the IRS assesses penalties after they receive my taxes? or is the penalty sent to me from Fidelity for me to enter on my tax form? If the IRS assesses the penalty after I send my taxes, maybe they wouldn't charge the penalties. That would be great.
See IRS Publication 590B for a year before 2020.
It's available on the IRS website.
The publications are clear as mud to me. I will download it and go over it to try and absorb it.
When you said that you inherited the IRA in 2007, I assume that your father died in 2007.
With 15 years of missed RMDs (RMDs were waived for 2009 and 2020), I'm going to decline to comment on what should be done. What could be done is take a distribution equal to the combined amount of all of the missed RMDs determined as Opus 17 described (which requires knowing the 2007 through 2023 year-end balances), then filing 2008, 2010 through 2019 and 2021 through 2024 Forms 5329 requesting waivers of the penalties. Although the IRS commonly grants the waivers, there is no guarantee that the IRS would do so. If they don't, the penalties could total close to half of the late-taken amount. Depending on your age in 2008 and using (for simplicity) a constant 8.5% growth rate, the missed RMDs plus your 2025 RMD would probably total anywhere from around $72k (if you were age 40 in 2008) to the entire balance (if you were age 65 in 2008).
(Since it's required by law to provide you with the year-end balances, it's highly doubtful that Fidelity did not provide you with year-end statements or Forms 5498 showing the year-end balances. Year-end statements going back to 2015 are available from Fidelity online.)
I never said the 10 year rule applied. In 2007, it was a 5 year rule, or life expectancy payments (RMDs).
@ProbablyMike wrote:
So the IRS assesses penalties after they receive my taxes? or is the penalty sent to me from Fidelity for me to enter on my tax form? If the IRS assesses the penalty after I send my taxes, maybe they wouldn't charge the penalties. That would be great.
Income taxes are mostly on the honor system. In theory, the IRS could look at your tax returns and deduce that you were not taking RMDs on this inherited IRA. In practice, they don't really do this. But if you are selected for audit, they can go back and find everything.
Separately, there is a 3 year (sometimes 6 year) statute of limitations on tax returns. It is possible, that the IRS can no longer penalize you for missed RMDs more than 6 years back. But I would want advice from my own local professional on that.
Thank you. Looking through my tax papers, I indeed have form 5498 with the IRA balance listed. I have more tax years to look through I hope I saved each year. Sorry about saying I didn't receive statements listing the IRA from Fidelity in the earlier post. I was a little over 40 in 2008.
The statute of limitations on missed RMDs only applies to RMDs missed for years after 2022 (changes from the SECURE 2.0 Act), so there has been no expiration of a statute of limitations in this case.
@ProbablyMike wrote:
Thank you. Looking through my tax papers, I indeed have form 5498 with the IRA balance listed. I have more tax years to look through I hope I saved each year. Sorry about saying I didn't receive statements listing the IRA from Fidelity in the earlier post. I was a little over 40 in 2008.
If you want to calculate your RMDs, then do the following.
Your first RMD was due in 2008. Look up your single life expectancy on table I of publication 590-B for 2008.
https://www.irs.gov/pub/irs-prior/p590--2008.pdf
Suppose you were age 55. Your life expectancy was 29.6 years. So your RMD for 2008 was the balance on 12/31/2007, divided by 29.6.
There was no RMD due in 2009.
For 2010, you don't get a new life expectancy number from table I, instead you subtract 2 years from the previous figure. So your RMD for 2010 was the balance on 12/31/2009 divided by 27.6 (29.6 minus 2).
Your RMD for 2011 was the balance on 12/31/2010 divided by 26.6 (29.6 minus 3).
And so on.
In 2022, the life expectancy table was revised, your life expectancy at age 55 is now considered to be 31.6 years. So for 2022, your RMD is the balance on 12/31/2021 divided by 17.6 (31.6 minus 14)
For 2023 your RMD is the balance on 12/31/2022 divided by 16.6 (31.6 minus 15).
And so on.
@dmertz wrote:
The statute of limitations on missed RMDs only applies to RMDs missed for years after 2022 (changes from the SECURE 2.0 Act), so there has been no expiration of a statute of limitations in this case.
Yikes. But good to know.
"The publications are clear as mud to me. I will download it and go over it to try and absorb it."
Generally, it takes about five readings before you can assimilate what the Pub is trying to tell you.
That's my experience from 25 years ago.
Even then you can misread it and think you know the instructions but not really know it correctly.
I found all my Fidelity 5498 statements back to 2007 which I am glad about. Your explanation of the RMD calc is very clear. The publication jumps around a lot which makes it confusing, it seems focused on a spouse inheriting an IRA.
It seems like an issue with calculating the historic RMD is, since no distribution was taken, the value of the IRA never decreased for the next RMD and the next and so on. Unless I subtract each RMD from the end of year balance each year. Maybe not reducing the IRA value by calculated RMDs isn't an issue, not sure.
A question about life expectancy table, is there there a month in the year that I would take my age at? Or is it my age on January 1st? Or maybe my age when I requested a distribution from the IRA?
From the document, it sounds like the year before or after my birthday is to be used. So basically my age I would be on December 31.