topic Calculating RMDs for traditional IRAs inherited after 2019 in Retirement tax questions

Calculating RMDs for traditional IRAs inherited after 2019

shydig — Fri, 25 Nov 2022 06:50:10 GMT

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.

Re: Calculating RMDs for traditional IRAs inherited after 2019

dmertz — Fri, 25 Nov 2022 13:15:38 GMT

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.

Re: Calculating RMDs for traditional IRAs inherited after 2019

NCperson — Fri, 25 Nov 2022 13:33:48 GMT

@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 😀

Re: Calculating RMDs for traditional IRAs inherited after 2019

shydig — Fri, 25 Nov 2022 23:16:50 GMT

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.

Re: Calculating RMDs for traditional IRAs inherited after 2019

fanfare — Sat, 26 Nov 2022 00:31:18 GMT

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

Re: Calculating RMDs for traditional IRAs inherited after 2019

fanfare — Sat, 26 Nov 2022 00:59:59 GMT

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

Re: Calculating RMDs for traditional IRAs inherited after 2019

shydig — Sat, 26 Nov 2022 03:30:34 GMT

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.

Re: Calculating RMDs for traditional IRAs inherited after 2019

NCperson — Sat, 26 Nov 2022 17:17:13 GMT

@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-bomb

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!

Re: Calculating RMDs for traditional IRAs inherited after 2019

shydig — Sun, 27 Nov 2022 03:26:40 GMT

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.

Re: Calculating RMDs for traditional IRAs inherited after 2019

NCperson — Sun, 27 Nov 2022 20:23:04 GMT

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

Re: Calculating RMDs for traditional IRAs inherited after 2019

shydig — Mon, 28 Nov 2022 06:29:06 GMT

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.

Re: Calculating RMDs for traditional IRAs inherited after 2019

fanfare — Mon, 28 Nov 2022 16:45:30 GMT

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

Re: Calculating RMDs for traditional IRAs inherited after 2019

NCperson — Mon, 28 Nov 2022 17:15:32 GMT

@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.

Re: Calculating RMDs for traditional IRAs inherited after 2019

fanfare — Mon, 28 Nov 2022 19:20:33 GMT

"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

Re: Calculating RMDs for traditional IRAs inherited after 2019

shydig — Tue, 29 Nov 2022 05:15:12 GMT

@NCperson

@fanfare

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

Re: Calculating RMDs for traditional IRAs inherited after 2019

thaiguyinla — Sat, 10 Feb 2024 13:45:05 GMT

Now a year plus later, can anyone with knowledge chime in on where the IRS has ended up on the issue of RMDs for non-spouse inherited IRA as pertaining to the 2023 tax year and beyond?

Specifically, for those like the OP and myself who have non-spouse inherited IRAs under the newer 10-year required draw-down period?

My deceased father was old enough to have begun taking RMDs on his IRA up until his death in 2020, where he took his final RMD. But for the 21 and 22 tax years, I didn't do any formal RMDs for that account that I inherited because of the IRA's pending guidance.

But I did for the past two years start doing my own informal 10-year plan of distributions/withdrawals each year in order to avoid the balloon tax debt problem at the end of my 10 year drawdown period.

TurboTax is asking me this year how much of my 2023 distribution was an RMD -- all, none or part. I'm sure I withdrew more in 2023 than whatever formula RMD applies. But I don't know how to calculate what my actual RMD would be, and whether it's based on MY age when I inherited the IRA, or what my father's age is/was???

Re: Calculating RMDs for traditional IRAs inherited after 2019

dmertz — Sat, 10 Feb 2024 13:45:23 GMT

For beneficiaries required under the proposed regulations to take RMDs under the 10-year rule, the IRS has similarly waived the penalty for not taking the RMD in 2023.

Re: Calculating RMDs for traditional IRAs inherited after 2019

thaiguyinla — Sat, 10 Feb 2024 13:47:54 GMT

Wow! That's good news... So why then is TT bugging me about how much of my 2023 inherited IRA distribution was an RMD vs how much wasn't???

Re: Calculating RMDs for traditional IRAs inherited after 2019

dmertz — Sat, 10 Feb 2024 13:53:03 GMT

TurboTax is actually asking how much of the distribution is ineligible for rollover. Because a distribution paid to a non-spouse beneficiary is never eligible for rollover, the correct answer it that it is all RMD. However, TurboTax already treats a distribution paid to a non-spouse beneficiary as being ineligible for rollover, so the answer you provide to this unnecessary question is irrelevant (even in years where the penalty for not taking the RMD is not waived).

Re: Calculating RMDs for traditional IRAs inherited after 2019

thaiguyinla — Sat, 10 Feb 2024 13:58:30 GMT

And how about this part pertaining to inherited non-spouse IRAs on the 10-year drawdown plan:

"But I don't know how to calculate what my actual RMD would be [ for future years where there might actually be a penalty for failing to do the required RMD], and whether it's based on MY age when I inherited the IRA, or what my father's age is/was???"