My 80yo father died in July of 2023. He left his IRA to adult children. He did not take his RMD in 2023. Does the penalty waiver for inherited IRAs still apply to us?

[madberry]

I am so confused as to whether the RMD penalty waiver for inherited IRAs in 2023 still applies if the original IRA owner did not take their RMD in their year they died (2023). In other words, would we only be allowed to skip the RMD this year if my father had taken his RMD? And because he didn't, do we still have to take his RMD for the year even though we are only heirs/beneficiaries and penalties for heirs of an IRA are waved for 2023? Extremely confused. Asking because taking an RMD will move us up a tax bracket.

[dmertz · Accepted solution]

The 2023 penalty waiver applies to annual beneficiary RMDs under the 10-year rule, not to completing your father's year-of death RMD.  A beneficiary must complete your father's the year-of-death RMD (which is not a beneficiary RMD even though it is paid to a beneficiary).  The beneficiary RMDs in this case do not begin until 2024, the first of the 10 years under the 10-year rule.

Recent changes to the tax code provide an automatic waiver of the excess accumulation penalty if a beneficiary completes your father's 2023 RMD by the due-date of the beneficiaries' 2023 tax returns, including extension.  If this distribution is made in 2023, it goes on the beneficiary's 2023 tax return.  If instead it is made in 2024 by the due-date of the beneficiary's tax return it will go on the beneficiary's 2024 tax return along with the beneficiary's RMD which must be completed by year-end.

The beneficiaries can complete the year-of-death RMD in any combination.  One beneficiary can take a the entire year-of-death RMD or it can be taken by a number of beneficiaries as long as the total taken satisfies the year-of-death RMD.

[madberry]

Thank you so much for your response, extremely helpful! I want to make sure that I understand correctly: I could potentially wait to take his RMD before the tax deadline of 2024 without a penalty for having not taken his RMD before EOY 2023, which ultimately could help me avoid entering a higher tax bracket this year (we expect to be in a higher tax bracket next year regardless of additional income, but this year we are very close to the cut-off). And if I were to wait until 2024 to take his RMD, the only caveat is that I would have to take two RMDs that year, my father's and my own. Is that correct? Or did I completely misunderstand?

[dmertz]

You understand correctly.  However, I failed to mention that the automatic waiver if the year-of-death RMD is completed after year-end but by the due date of the tax return is a proposed regulation from the IRS, not a final regulation.  Still, there should be no problem following the proposed regulation which indicates that it will apply for years 2022 and later.  I can't imagine that this will not be part of the final regulations.