It came to our attention only after filing our 2021 tax return that my wife possibly should have taken an RMD on an Inherited IRA left to her in 2021 (split equally between her and her three siblings) by her dad, who was 89 when he died in April of 2021 and, therefore, been taking distributions already. (My wife was 64 at the time of his death.) After the suspension of RMD regulations in 2020, we were not aware that the RMD regulations had gone back into effect for 2021. Nor were we clear on what my wife's RMD obligations were for the newly acquired Inherited IRA, given that "proposed regulations" on how to handle required distributions pertinent to the 2019 SECURE Act were not released until February of 2022 and are STILL unclear to tax professionals, let alone average taxpayers like myself.
Given all the above, my wife did not not take what appears to be a required RMD in 2021 for tax year 2021. Meanwhile, we had already filed out 2021 income tax return before even discovering this might be a problem. L, then, are:
1) Should she take an RMD asap for tax year 2021? If yes, do we file a From 5329 separately? Or must we file an entire 2021 amended return that includes the Form 5329? Or do we wait until filing taxes in 2022 and include both a 2022 RMD and also report the delinquent 2021 RMD together on the 2022 tax return? OR, should we wait until the IRS comes out with its final comments on the new regulations later this year, in case they waive the entire 2021 RMD requirement because of lack of clarity up to this point? Regardless of your answer, how should we handle the issue in terms of using TurboTax to resolve it? Thanks in advance for any thoughts or advice on how to proceed.
1) did your father in law take RMD in the year of his death (2021). if yes, then your wife has no further 2021 RMD obligation.
2) as far as the new rules that are proposed (and expect those will be the rules), your wife will need to take RMDs EACH YEAR that liquidate the IRA in 10 years. There is a formula that calculates that annual minimum (fairly easy) , but you may need a strategy to be sure it does liquidate in a manner that doesn't force you into a high tax bracket in year 10.
3) there is no reason Turbo Tax can't handle this once the trustee generates the 1099-R.
4) have you talked to the IRA trustee on what to do about 2021?
unfortunately, the 5329 goes with the tax year you missed,
and the late distribution goes with the tax year you took the distribution.
Note: the IRS rule is still a proposed rule.
Notel The IRS always grants a waiver of the 50% penalty when you ask for a waiver and take timely action.
You could argue that you don't need to take a 2021 RMD because the ruling still has not been finalized, and did not exist at all in 2021.
when you are subject to the 10-year liquidation rule for newly inherited IRAs,
to spread the tax impact most evenly over the ten years,
your divisor should be : 10 - N where N is the number of annual distributions you already took.
In other words, with four years gone by, you want to take out one sixth of the IRA,
If you are a young beneficiary, this rule would generate much larger RMD than the RMD based on Pub590B formulas.
The RMD required to be taken for 2021 is her dad's RMD. Any portion of her dad's 2021 RMD that her dad had not taken as of his death in April 2021 must be satisfied by the beneficiaries and can be taken by the beneficiaries in any combination.
The SECURE Act only affects the beneficiary RMDs which under the proposed regulations are to be taken annually based on the Single Life Expectancy of the beneficiary in 2022, reduced by one each subsequent year and the entire inherited IRA must distributed by the end of 2031.
I was just finishing this when @dmertz posted:
@fanfare - assuming the IRA owners dies after the age of 72 (which occured in this case),the non-spouse beneficiaries must fulfill the same RMD obligation in the year of death. I am not aware that the proposd rules impact the RMD in the year of death. I thought that since the rules cover owners who died after 12/31/19, then it's those that passed in 2020 is where the confusion lies as it pertains to 2021 (not the year of death) RMD.
@bmwermuth - this would be a good article to read. As you state there were 4 beneficiaries, did any of them take the RMD in 2021? Remember "RMD" mean the required minimum distribution, but it can be more than that. If one of the other 3 cashed in part of their inherited IRA, that could satisfy any RMD requirement you wife may otherwise have.
The owner's 2021 RMD requirment was
1) the balance of the IRA on Dec 31, 2020
2) divided by either a) 12 if the father had his 89th birthday in 2021 or b) 11.4 if the father was to have his 90th birthday in 2021
3) equals the 2021 RMD requirment.
That RMD can be satified by the owner taking some or all of the RMD before passing OR some or any of the beneficiaries taking distributions in 2021 that equalled or exceeded 3) minus what the owner already took. So even though your wife didn't take any RMD from this inherited IRA in 2021, how about the 3 others? how about dad? did they? and did the sum of those distributions exceed 3)? that could solve your 2021 problem......
Thank you for all this information, NCperson. Regarding #4 - The trustee (my wife's older sister) did inform my wife she would need to take an RMD equal to 1/4 of the RMD due for 2021, but we were unclear as to whether that 2021 RMD would be for her deceased father's obligation, or if it would be the year 1 RMD obligation of my wife as the owner of the new Beneficiary IRA. Lots of confusion, but we now understand it would have gone toward satisfying my late father-in-law's RMD obligation based on his IRA's year end 2020 value, because he had not taken it before he passed away, to answer your item #1. Regarding #2, we were unsure if the new rules regarding the Secure Act of 2019 were in effect for a 2021 RMD based on year end 2020 account values. We've now learned the IRS thinks so, even if the regulations were listed as merely "proposed." We also were unsure if the 2020 RMD suspensions due to COVID were still in place. We found out after the fact (after 2021 came and went) that they were not. Regarding #3, I'm wondering if TurboTax 2022 Home & Biz will have a section of the "Interview/Easy Entry" option covering whether or not and RMD was missed the previous tax year but rectified after sometime in the following year. I hope so! Thanks again for all your help.
Fanfare, does the fact that the 5329 goes with the tax year we missed mean we have to file an amended return, or rather because we didn't actually take a distribution in 2021 as we should have mean there's nothing to amend? If the latter, then I'm assuming we take the missed distribution in 2022 (along with year 1 of my wife's RMD obligation for 2022) and fix it all then. Which means we'd request the tax waiver for the 2021 missed RMD due to lack of clarity and guidance by the IRS, correct?
Thank you, NCperson, for the info regarding options for divvying up the RMD between beneficiaries in any way they'd want. We were not aware of that, so we will definitely check with the other beneficiaries to see if any took more than their quarter of the total.
dmertz, Thank you for the info. It was unclear as to whether the 2021 missed RMD was for my wife's first year of obligation, or rather to satisfy her late father's last. Knowing the latter now, I think you're right in that the new rules don't apply to that obligation, so it appears we'll definitely want to take that distribution to correct the error as soon as possible and ask for a tax liability waiver. But, I would do all of this on my wife's (our joint ) 2022 tax return and not by filing an amended 2021 tax return (since we didn't take the RMD in 2021.). Does that sound right?
@bmwermuth - it appears you got a lot of clarity from all the comments
1) none of the proposed regulations (which we might as well assume are the final regulations to be conservative) impact the year of death RMD. There was a 2021 requirement in your situation that could have been satisifed (and maybe was satisifed) by the other 3 beneficiaires
2) for 2022, the 4 beneficiaries are each on their own. Based on the new regulations each has an RMD requirment each year and the IRA must be liquidated no later than Dec 31, 2031. 2022 would be the first of those 10 years.
3) Since your wife was 64 in 2021, and assuming she turned 65 in 2022, her 2022 RMD obligation would be the December 31, 2021 balance of HER inherited IRA divided by 22.9. See page 49
4) in 2023, the RMD is based on the Dec 31, 2022 balance divided by 21.9. Then in 2024, it's the Dec 31, 2023 balance divided by 20,9. The divisor is reduced by 1 each year.
5) Those are simply the mimimums. What you don't want is to end up in year 10 with a large balance that has to be distribited; that may impact your tax bracket and even the IRMAA medicare premiums. So a thoughtful approach such as 1/10 of the balance the first year, 1/9 the second year, 1/8 the third year, etc, might be better than the minimum requirement. it'll take some assessment and maybe the use of a financial planner to limit any potential year 10 issue.
Thank you, NC Person,for all that helpful information! I appreciate it very much. The only question I need answered at this point is confirmation as to how we rectify the situation with the IRS. I think I understand it to be that my wife should take the missed 2021 distribution as soon as possible, but then wait to report it on our 2022 tax return. It would be on that tax return that we would fill out the form 5923 and ask for a waiver, Is that correct?
@Bruce-W correct -
but rectifying the situation really means the 4 beneficiaries sitting down and explaining what each did to cover the 2021 RMD situation. If the other 3 distributed enough, then you don't need to do anything; it's just the way it turned out. that is the first step - the agreement among the 4 how they are going to collectively solve the problem. it may be none of the 4 took the RMD and each agrees to take 25% of the required 2021 in 2022 to resolve the sitatuion. again, just needs to be an open frank conversation. Hopefully evenone is on good speaking terms
if you take out what you think is your share of the 2021 RMD and it turns out the other 3 already distributed enough to cover 2021, then all you are doing in 2022 is meeting the 2022 RMD requirement and them some and no explanation to the IRS required.
again, best to understand what the other 3 did to put the 2021 RMD situation behind the 4 beneficiaries before do anything else.
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