inherited IRA

[LRU]

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. 

[Andrew_W]

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,

• Empty the entire account by the end of the 10th year following the year of the account owner's (or eligible designated beneficiary's) death
• Relief under Notice 2022-53 for beneficiaries subject to the 10-year rule
  • The IRS will not treat a beneficiary of an inherited account in a plan or IRA who was subject to the 10-year rule and who failed to take an RMD for 2021 and 2022 as having failed to take the correct RMD

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.

[LRU]

How is "designated beneficiary" defined?  Myself and two siblings were the three listed beneficiaries.

[Andrew_W]

Designated beneficiaries are those who are not "eligible designated beneficiaries".

Eligible Designated Beneficiaries are:

• Spouse or minor child of the deceased account holder
• Disabled or chronically ill individual
• Individual who is not more than 10 years younger than the IRA owner or plan participant

This is per IRS regulations: Retirement topics - Beneficiary 

[fanfare]

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.

@LRU 

[ProbablyMike]

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.

[Opus 17]

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@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.

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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.

[ProbablyMike]

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.

[fanfare]

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 ??

@ProbablyMike 

[fanfare]

"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.

@ProbablyMike 

[ProbablyMike]

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?

[ProbablyMike]

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.

[fanfare]

See IRS Publication 590B for a year before 2020.

It's available on the IRS website.

[ProbablyMike]

The publications are clear as mud to me. I will download it and go over it to try and absorb it.

[dmertz]

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.)