RMD on inherited IRA?

[Xian2]

I inherited IRA from my mother who passes away March 2020. I was a designated (non eligible) beneficiary.

The new 10 year rule applies, I have taken a distribution in 2021 (but not 2020) and TT is asking if this was a RMD? 

My mom was 83 and had done RMDs before her death.

I had interpreted the 10 year rule to mean that account has to be depleted after 10 years, but without any annual requirements for years 1-9 , assuming all funds could stay in there until year 10.

question1:  is  my distribution considered a RMD? if yes, TT asks the exact amount of RMD - how do I know?

question2: it seems there is discussion now on 10 year rule interpretation from IRS, some sources stating that in fact RMDs are required for year1-9 as my mother was old enough and had done RMDs already

I read publication  590-B, and this does NOT seem clear to me

do you know if in fact RMDS for year1-9 are required or is this still in debate?

thanks

[LudwigVan_fan]

I'm not sure why you're not an eligible beneficiary, but I'm going to base my opinion on that you are not since you stated that.

Yes, according to Pub 590B, you are not required to have an RMD.  page 11

For example, if the owner died in 2021, the beneficiary would have to fully distribute the IRA by December
31, 2031. The beneficiary is allowed, but not required, to take distributions prior to that date.

Therefore, this is a voluntary distribution and not an RMD.  I would think any RMD under the 10-year rule would happen in year 10.

In my opinion, for your question 2, since you are covered by the 10-year rule, the RMD for life expectancy beneficiaries would not apply.  It would appear based on Pub 590B, the 10-year rule as required supersedes the RMD rule for life expectancy rule.  In my opinion, the key sentence is "The beneficiary is allowed, but not required to take distributions prior to that date".

[Xian2]

thanks so much - I will go with NO RMD for now

but further research seems to indicate that IRS may require RMDs in year1-9 (in future)

the proposed regulations have been published by IRS in February and are out for public comments until May, so we should have clarity later this summer  

find here: https://public-inspection.federalregister.gov/2022-02522.pdf

cheers,

[dmertz]

The new regulations proposed by the IRS earlier this year require that you take annual RMDs base on your life expectancy and completely distribute the IRA by the end of the 2030.  IRS Pub 590-B likely won't be updated to reflect this until the proposed regulations become final later this year.

Unless the amount in the inherited IRA is rather small, it probably makes sense to take distributions before the 10th year anyway so that this income doesn't get bumped into a higher tax bracket by taking it all at once.  Also, if the inherited IRA is invested in investments that would be subject to taxation at long-term capital gains rates if held outside the IRA, this is also a reason to get the funds out of the inherited IRA earlier.

It doesn't matter how you answer the question that asks how much of the distribution was RMD.  TurboTax only asks to determine how much might be eligible for rollover, but a non-spouse beneficiary is not permitted to roll over any of the distribution anyway.

[LudwigVan_fan]

@dmertz   I don't quite understand your statement:  "Also, if the inherited IRA is invested in investments that would be subject to taxation at long-term capital gains rates if held outside the IRA, this is also a reason to get the funds out of the inherited IRA earlier."

What difference does that make?  Coming out of tax deferred IRA is ordinary income.  Coming out of ROTH is non-taxable.

[dmertz]

That comment applies to inherited traditional IRAs.  One invests with the expectation of gains.  If those gains occur inside the IRA, those gains will be taxable at ordinary income tax rates when eventually distributed.  If those gains instead occur outside the IRA (because and are managed so that they are taxed at long-term capital gains rates, the amount lost to taxes will be lower.  For example, leave $1,000 in a traditional IRA with average investment gains of 10% per year for 10 years, the distribution of all of it after 10 years will be the original $1,000 plus about $1,600 of gains, all taxable as ordinary income.  If one instead takes a distribution of the $1,000 taxable as ordinary income and invest it in the same capital assets outside of the IRA for 10 years such that the gain qualifies for long-term capital gains treatment, the $1,600 will be taxable at the lower long-term capital gains rate.  Still, depending on the tax bracket and the amount of gains, the time value of the money that would have to be used pay the tax on the $1,000 if taken out at the beginning of the 10 years might be greater than the eventual tax savings one would get from the $1,600 being taxed as long-term capital gains instead of ordinary income.  Each situation needs to be evaluated depending on the actual tax rate and gains.