Calculating RMDs for traditional IRAs inherited after 2019

[shydig]

I inherited a traditional IRA from my dad in 2020 and it falls under the 10-year rule.  If I calculate the RMDs on current life expectancy tables and make 9 years of RMD withdrawals it results in a large "Balloon" distribution in year 10?  I've been advised by some helpful people on this board that penalties are waived for failing to make RMDs for 2021 & 2022.   As of today, its my understanding that the IRS has not yet finalized any decisions on RMD requirements for 2023.  So my question is, "Has anyone seen or heard any discussion about changes in the RMD calculation for these short window inherited IRAs?"  Thanks for any help you can provide. 

[dmertz]

It's not clear what your concern is.  You can always take out more than the RMD.  The RMD is the minimum you must take in any given year.

[NCperson · Accepted solution]

@shydig --  you may want to contemplate distributions LARGER than RMD so there isn't a balloon in the 10th year.  That 10th year balloon could put you in a higher tax bracket, so best to try and smooth out the distributions, but it is depedent on your specific income situation. 

a simple strategy suggested by others on these boards would be to distribute 1/9 of the 12/31/21 balance this year, 1/8 of the 12/31/22 balance in 2023, 1/7 of the 12.31.23 balance in 2024, etc.  That way there is no balloon in year 10 and you've smoothed out the distributions over time. 

However, that is just a simple approach, this can get more complicated if you are on Medicare or are going to go on Medicare during these 10 years - because there is something called "IRMAA" which adds to your medicare premium, but is really a tax in disguide, based on your AGI, which of course is now going to be higher because of the distributions from the inherited IRA.  Dependent on your income you can develop strategies to minimize this phanton tax.  

this is a good article that explains IRMAA

https://thefinancebuff.com/medicare-irmaa-income-brackets.html

also, the current set of tax brackets are set to revert to the 2017 tax brackets in 2026, unless Congress adjusts them.  That means taxes will be higher in 2026, so another strategy is to front load the distributions during 2022-2025 to take advantage of lower tax brackets.  

Depending on your income level, this gets very complicated and is not for the faint of heart! 

ps RMD is an abbreviation for Required MINIMUM distribution, not Required MAXIMUM distribution 😀

[shydig]

Thanks for your help.  Thanks for timely advice on IRMAA as I am 62.  I'm working on a 10-year plan.  Historically, my strategy focused on tax deferral.   Today, I'm "blessed" with limited income so I'm shifting strategies to minimize long-term taxes.  The inherited IRA withdrawal is a mandate with 8 years remaining for me.  As of today, I still enjoy flexibility on how/when I realize that income. But any potential changes in the RMD rules are important to me.  The other major consideration driving my plan is Roth conversion.  Again, there is a lot of noise around the IRS changing rules on conversion.  If those rules are going to change, I don't want to miss the window of opportunity for conversion (or partial conversion).  If the IRS is waiving penalties for inherited IRA RMDs for 2022 I'm considering skipping that for 2022 and just realizing income from a partial Roth conversion.  Obviously, I'm trying to balance both streams to remain in a lower tax bracket.   Thanks for all of your help.                

[fanfare]

This was all covered in detail on your previous thread from the other day, and I thought we answered your question.

You will have to take the RMDs in 2023 and following years since the owner died after the age of 72.

@shydig 

[fanfare · Accepted solution]

The notice says the Ruling does not apply before 2023.

So if you decide to skip the 2022 RMD, IRS will let you get away with that.

The Build Back Better is dead along with its restrictions on Roth Conversion.

No one can predict what Congress will do in the future.

@shydig 

[shydig]

Thanks again for your insights and patience.   Sorry to seem redundant.  Just trying to develop a 10-year plan without getting whipsawed by some known, upcoming change on RMDs and/or conversions.  Now I am at least comfortable with year one of my plan. 

[NCperson · Accepted solution]

@shydig - here is a GREAT article on the 'time bomb' that awaits if you defer Roth Conversions.  for many, there is a 'sweet spot' to accelerate Roth Conversions during the years after you retire and before Social Security (age 70 at the outside) and RMDs (age 72) kick in.  

https://www.kiplinger.com/retirement/retirement-planning/605109/is-your-retirement-portfolio-a-tax-b...

It is interesting that we have been conditions to 'defer, defer, defer' during our working years, but during the 'sweet spot' noted above, the mantra should really be 'accelerate, accelerate, accelerate'.  (and it is VERY painful to write these BIG checks to the IRS each quarter; I've been doing it the last 4 years to take advantage of the 'sweet spot').

Once SS and RMDs kick in, reducing income and staying out of higher tax brackets and higher IRMAA payments is literally impossible without giving the money away via QCDs. 

I've put a lot of time into this topic and one piece of advice: I wouldn't worry about whether Congress changes the rules again. (for example, even though the tax brackets are scheduled to revert to 2017 levels comes 2026, Congress could always extend the current brackets, so even That is even an unknown).   It's complicated enough to come up with a plan with the known rules. 

enjoy reading! 

[shydig]

Many Thanks.  That is a great article.  I'm guessing lots of folks (without a tax advisor) aren't aware of the time bomb they will face with RMDs.  I am in the sweet spot.  The long-term tax advantages of a Roth conversion will be a priority in my plan.  I agree that it's complicated enough to come up with a plan under the known rules.  The only thing that is certain about the tax code is that Congress will continue to make changes.  With that in mind, I plan to accelerate my conversions.  Thanks again for some great insights.

[NCperson]

@shydig - one small point for your plan...  RMDs must be satified before your can do Roth Conversions... 

[shydig]

Thanks again!  Good to know.  Need to look into that to see how it impacts me for 2022.  I may have to do the semi-required RMD on the inherited iRA this year too.  

[fanfare]

You don't have to take  an RMD before a conversion if you are not going to take an RMD.

If you are 62 you don't have RMDs.

@shydig 

[NCperson]

@fanfare -that is actually an intersting question and wonder your thoughts:

taxpayer is 62 and inherited an IRA from a parent who was subject to RMDs and passed in 2021.  

Since the taxpayer is required to take RMDs on the inherited IRA, does that have to take place prior to doing a Roth Conversion from the taxpayer's own IRA in any given year?  The taxpayer owns both IRAs..... one inherited and one his one. 

[fanfare · Accepted solution]

"Since the taxpayer is required to take RMDs on the inherited IRA, does that have to take place prior to doing a Roth Conversion from the taxpayer's own IRA in any given year?  "

As we know, Inherited IRAs are maintained independently of Traditional IRAs.

The answer is NO.

@NCperson 

[shydig]

@NCperson

@fanfare 

Thanks for digging deeper on this issue.  Very helpful.  Your help may keep me out of trouble this tax season.