Withdrawing more than the RMD from an IRA BDA

[biggap]

We have each inherited an IRA, and set up appropriate IRA BDA accounts. For personal reasons, we are withdrawing well in excess of our RMDs. TT is asking whether all or part of this distribution was an RMD, and if only part of it, then how much was the RMD. I can understand if I'm withdrawing *less* than my RMD, because explanations and penalties would then ensue. Since I am withdrawing more, how accurate does this answer need to be? 

Mine is actually simple to figure out, spouse's not so much. Short version, the funds are in two separate institutions, one of which was disputing how much of it we were entitled to. We succeeded in withdrawing a plausible amount, based on our calculations of the estimated total, but how should we answer the same question? Again, we are withdrawing more than the RMD, so how accurate does the answer need to be? 

[fanfare]

just enter that all of it was RMD.

TurboTax will be satisfied.

[biggap]

Well, sure, that's simple and obvious. The unwritten question is whether TT reports this detail to the IRS, which already has other documentation to compare with, not to mention previous years.  If not, then the answer doesn't have to be accurate. 

However, if it DOES go to the IRS, the situation is more subtle. If both RMDs are reported to be 5K, but the balance in each is substantially different, does that trigger something at the IRS? Or since I've previously reported my RMD accurately but this year I say it's the whole thing, and the 3yr sequence looks like 5K, 5K, 20K, am I triggering some algorithm at the IRS?

I know, who knows what triggers the IRS. I'm just trying to avoid the most obvious inconsistencies, especially when the information is irrelevant. After all, TT is STILL asking whether we have health insurance, and whether we've had it all year. 

[Opus 17 · Accepted solution]

@biggap 

The reason Turbotax asks is there are some things you can't do with the RMD itself.  For example, you can't recontribute the required portion of the withdrawal to a different IRA, or roll it over to a different IRA.  Your answer is not reported to the IRS, but is used to make sure that the rest of your tax return is OK.  For example, if you contributed some money to your own IRA, Turbotax will make sure you had enough other income (not counting the RMD) to permit the contribution.

The purpose of the RMD is that you can't keep the money in a tax-free account forever.  After you inherit it, you can withdraw it all at once, or within 5 years, and pay the tax then.  If you want to keep it longer than 5 years, you have to withdraw at least a minimum amount each year and pay tax on it**.  The amount you must withdraw each year is determined by your life expectancy and the account balance, and has no relation to any amounts you withdrew in the past.  You must at least withdraw the minimum amount, you can always withdraw more if you want.  

(**And, this "stretch" option only applies to IRAs that were inherited in 2019 or earlier.  IRAs inherited in 2020 or after don't have any RMD requirement—you must withdraw all the money within 10 years, but you don't have any requirements along the way.)

[dmertz]

The only reason that TurboTax asks this question is to determine how much might be eligible for rollover.  If you  are a non-spouse beneficiary you are not permitted to roll any of the distribution over.   With nothing rolled over, it doesn't matter how you answer this question being posed by TurboTax.

However, TurboTax will separately ask if the amount distributed was sufficient to satisfy any RMD.  To be able to answer that question, you yourself need to determine how much was required to be distributed.  Any individual who receives less than the required amount is required to file From 5329 Part IX which assesses a 50% penalty on the amount of that individual's RMD that remained unsatisfied.

[biggap]

Thanks. Internal consistency check makes sense. There are plenty of times TT does something that takes me a while to trace back. Hadn't occurred to me in this situation. 

[bmwermuth]

My wife is in the same situation regarding an inherited IRA  RMD now for tax year 2024. The actual RMD amount was $2459, but she went ahead and withdrew $8000, mainly because she’ll be facing multiple other RMDs for other regular IRAs in about 6 years, so she’s taking more from this one now to spread out the taxes owed which will be owed on RMDs in general in the near future. Having taken $5541 more than was “required” from this non-spousal inherited IRA, how should she answer the  “was the entire amount for an RMD or not”  TT question prompt?  Will answering “yes” as opposed to “no” cause TT calculate the taxes due differently—or incorrectly? It shouldn’t, but the question the way it is phraed seems nebulous to me, so we wanted to be sure. We just want to make sure she is taxed properly for the $8000 withdrawal now and not just for the $2459 that was required, so we don’t incur a penalty from the IRS for underpayment down the road. I wish TT had phrased  the question more like “was this distribution you took more than what the RMD amount actually required?” That is the case here, so the answer would be “yes.” With that in mind, how should she answer the TT question? And yes, she made enough money in 2024 to qualify for a maximum Roth IRA contribution for 2024 ($8000) , which she did. Thanks in advance for your help. 

[fanfare]

to see if taxes are calculated differently, answer YES, then NO and observe the result.

[dmertz]

"how should she answer the  “was the entire amount for an RMD or not”  TT question prompt?"

It doesn't matter.  This particular question is asked only to determine how much is eligible for rollover.  In this case, the distributions was not rolled over.  (A distribution paid to a non-spouse beneficiary is not eligible for rollover.)

"Will answering “yes” as opposed to “no” cause TT calculate the taxes due differently—or incorrectly?"

In this case, no.  In the case where someone mistakenly rolled over an RMD, TurboTax will behave differently by allowing to be reported as rolled over only the amount in excess of the RMD.  Answering that the entire amount was RMD prevents TurboTax from even asking about rollovers or Roth conversions.

[fanfare]

@Opus 17 

" but you don't have any requirements along the way.)"

Incorrect - If the owner had reached Required Beginning Date, then beneficiaries also must take RMD each year.

[bmwermuth]

Thank you. 

[dmertz]

Opus 17 reply was thought to be correct at the time it was made.  The IRS subsequently published the regulations derived from SECURE Act tax-code changes that require beneficiaries subject to the 10-year rule to take annual RMDs if the IRA owner passed after the owner's RBD.

[VolvoGirl]

@dmertz   The RMD questions this year are very confusing.  I'm testing answering different ways and can't understand the questions.  There have been several questions in the forum about this.  Can you go though and test them too?  The questions are crazy and I can't figure out what amount they want you to enter.   Like are the followup RMD questions just for that one 1099R or for your total RMD from all accounts?  

Like I entered a 8,000 distribution and said part of it applied to RMD.

Then How much was RMD I put 5,000.

Then next screen asked me again What was the RMD for Sara's account?  Is that for only this account or all IRA accounts?  

I haven't tried beneficiary IRA (code 4?).  

[dmertz]

This is a case of nobody on the development team having an understanding of the big picture.  These two questions are asking for the same information (the RMD amount) but for different reasons.  The first is to determine how much of the distribution might be eligible for rollover.  The second is the new question that is attempting  to determine if the RMD for a particular retirement account has been met.  Unfortunately, because RMDs for one IRA can be satisfied with a distribution from another of the individual's IRAs (and similarly with 403(b)s for 403(b)s), it doesn't work well to ask the second question on a per-1099-R basis.  When an RMD for one has been satisfied with a distribution from another, with the current implementation one has to manipulate the numbers to get a correct taxable result on Form 5329 Part IX (even though TurboTax is still in some cases omits from Form 5329 some of the amounts from accounts where the RMD has been satisfied that the IRS instructions indicate are to be included, but end up canceling each other out).  Because Form 5329 deals with the aggregate of any missed RMDs, the old way of obtaining the information needed to prepare Form 5329 by asking questions after clicking the Continue button on the page that lists the Forms 1099-R that have been entered worked better (as long as the user didn't skip the question).

This is just bad software design trying to handle a complex tax code.  I decline to provide generalized complex workarounds for such things.  The software developers need to do better.

[bmwermuth]

Agreed, dmertz. I think they (TT developers) can do better by reformatting this series of questions. Thanks for the input!