inherited IRA

[Opus 17]

@fanfare 

I never said the 10 year rule applied.  In 2007, it was a 5 year rule, or life expectancy payments (RMDs).

[Opus 17]

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@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.

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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. 

[ProbablyMike]

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.

[dmertz]

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.

[Opus 17]

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@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.

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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.

[Opus 17]

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@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.

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Yikes.  But good to know. 

[fanfare]

"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.

@ProbablyMike 

[ProbablyMike]

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.

[ProbablyMike]

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.

[ProbablyMike]

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.

[jtax]

>A question about life expectancy table, is there there a month in the year that I would take my age at? 

Good question.

It is your age as of your birthday in the tax year. That is oddly worded perhaps because they can't just say 12/31 I think because you might pass away during the year and still have an RMD.

See Pub 590B https://www.irs.gov/pub/irs-pdf/p590b.pdf , page 11, which says

Use Table I for years after the year of the owner’s death if you are the owner’s
eligible designated beneficiary or their designated spousal
beneficiary.

Example. You are an eligible designated beneficiary
figuring your first required minimum distribution. Distributions must begin in 2024. You become age 57 in 2024. You use Table I. Your distribution period for 2024 is 29.8.

[Opus 17]

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@ProbablyMike wrote:

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.

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You don't calculate the RMD based on what it would have been if you had taken it before, you calculate it based on the account balance as-is (or as-was).

[Opus 17]

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@Opus 17 wrote:

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@ProbablyMike wrote:

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.

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You don't calculate the RMD based on what it would have been if you had taken it before, you calculate it based on the account balance as-is (or as-was).

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If you follow @dmertz 's instructions for what you could do, it would be to calculate the RMD for 2008, and report on a 2008 copy of from 5329 that you should have taken that amount, and your penalty is calculated on the form (section VIII).  You can download historical forms and instructions from the IRS web site.  Form 5329 can be filed by itself because it has a signature line, I don't think you actually have to file a complete amended tax return.  You calculate the penalty, but don't send a check.  Instead, attach a written statement asking for a waiver.  Mail the signed form and attachment to the IRS.  Then repeat for 2010 and every succeeding year.  (Separate envelopes.)  There are probably web sites or tax books that will give you advice on how to write a request for a waiver. One of the things you might say is that you just didn't know that inherited IRAs were not subject to RMDs, and you only started asking questions when you were old enough to take your own RMDs.  One thing you should say is that, as soon as you realized the correct procedure, you calculated all your missed RMDs and made a very large withdrawal (in January 2025) and will report and pay tax on it for 2025.

Yes, each of your calculations may be slightly larger than it would have been if you had made the correct previous withdrawals.  But that's part of the cost of not making them in the first place, you must withdraw more now to get caught up to be correct. 

This is the procedure in the IRS regulations for correcting a missed RMD -- take it as soon as you can, and request a waiver (forgiveness).  The only thing different here is the scale, 15 missed RMDs instead of 1 or 2.  That's why you might want to go to a tax professional.

[dmertz]

Opus 17 is correct, actual year-end balances are to be used.  I think at one time the rules said to adjust the year-end balance after making up a late distribution for the amounts that should have been taken, but that was changed long ago to just use the actual balances (and probably only made sense if the late RMD was taken during the following year).

[ProbablyMike]

dmertz you're good. I added up all the calculated end of year RMD and it is 72k. 72,828.76 to be exact. The year end value fluctuated quite a bit, in 2021 it was 231,475 and then in 2022 it was 169,753. And the next year 222k.

Edit I forgot to skip 2020, so the total RMD dropped to 65.9k.

I will find an estate cpa and run this plan by them. I think you guys are better than a cpa that I find though 🙂