topic RMD Tax For Inherited IRA Prior To vs Following Death Of Original Owner in Tax law changes

RMD Tax For Inherited IRA Prior To vs Following Death Of Original Owner

Romper — Sun, 02 Jul 2023 14:01:44 GMT

Unfortunately my wife is expected to die in the next few days. This brings the following question:

The beneficiary of her Traditional IRA is our daughter. The IRA will become her Inherited IRA.

The 2023 RMD for my wife's IRA has yet to be taken.

Is the following correct?

- If I take the RMD prior to her passing, the RMD proceeds will be taxable to our joint tax return.

- If I wait until the RMD becomes our daughter's Inherited IRA, the RMD Proceeds will be taxable at her tax rate.

A link to a source would be appreciated.

Thanks in advance

Re: RMD Tax For Inherited IRA Prior To vs Following Death Of Original Owner

NCperson — Sun, 02 Jul 2023 16:14:12 GMT

that is correct. the amount of the RMD is the same for 2023 under either circumstance you note.

In 2024, the RMD is based on your daughter's life expectancy from the IRS tables and 2024 is Year 1 of the 10 years she has to liquidate the inherited IRA.

here is one article explaining it with a reference to the IRS Revenue Ruling 2005-36

https://www.thestreet.com/financial-advisor-center/what-advisers-need-to-know-about-the-year-of-death-rmd#:~:text=The%20Beneficiary%20Must%20Take%20the%20RMD&text=If%20the%20year%2Dof%2Ddeath,in%20Revenue%20Ruling%202005%2D36.

Re: RMD Tax For Inherited IRA Prior To vs Following Death Of Original Owner

VolvoGirl — Sun, 02 Jul 2023 16:25:09 GMT

And see IRS 590B for IRA distributions

https://www.irs.gov/pub/irs-pdf/p590b.pdf

Re: RMD Tax For Inherited IRA Prior To vs Following Death Of Original Owner

Romper — Sun, 02 Jul 2023 18:38:26 GMT

Thankyou NCperson for the timely response.

The article in the link is dated Jan 31, 2023. It is well written but I suspect out of date as it does not mention the 10 year rule.

Thanks again

Re: RMD Tax For Inherited IRA Prior To vs Following Death Of Original Owner

Romper — Wed, 05 Jul 2023 11:34:20 GMT

Thanks NCperson...

You stated "In 2024, the RMD is based on your daughter's life expectancy from the IRS tables and 2024 is Year 1 of the 10 years she has to liquidate the inherited IRA."

Do I understand correctly?

- In 2024 and beyond, an RMD based on our daughters life expectancy will be required.

- The RMDs based on her life expectancy would not empty the the inherited IRA in 10 years.

- She would need to take more than the RMD to empty it in 10 years.

Thanks again

Re: RMD Tax For Inherited IRA Prior To vs Following Death Of Original Owner

NCperson — Wed, 05 Jul 2023 12:17:18 GMT

@Romper

the RMD is not going to liquidate the IRA in 10 years. The IRS doesn't care what strategy is employed to empty the IRA in 10 years as long as 1) the required minimum is distribured each year and 2) it is emptied in Year 10. Personally, what your daughter doesn't want to do is have a large "lump' to liquidate in Year 10, which may push her to a high tax bracket.

The mimimum is based on Table 1 in the attached (page 48) For example, if your daughter turns 30 in 2024, then the 2024 RMD is the IRA balance on 12.31.23 divided by 55.3 (a little under 2%!). Then in 2025, the RMD is the 12/31/24 balance divided by 54.3. The divisor drops by 1 each year (you don't follow the table as she ages)

So simply taking the RMDs each year is only going to distribute around 20%-25% by the end of year 9 (and maybe less since presumably the money is invested and growing)

https://www.irs.gov/pub/irs-pdf/p590b.pdf

here is one strategy to "smooth: this over 10 years, but another strategy is to look at her tax bracket and combine 'smoothing' and take the income to the top of a tax bracket. it's a not necessarily a simple exercise and does take some planning. Everyone's tax situation is different.

This presumes a $100,000 IRA balance that grows 5% annually. The percent is the percent that would need to be distributed each year so that there is a smooth distribution of $12950 annually,

Year	Balance	income	dsitribution	percent
0	100,000
1	92,050	5,000	12,950	13%
2	83,703	4,603	12,950	14%
3	74,938	4,185	12,950	15%
4	65,735	3,747	12,950	17%
5	56,071	3,287	12,950	20%
6	45,925	2,804	12,950	23%
7	35,271	2,296	12,950	28%
8	24,085	1,764	12,950	37%
9	12,339	1,204	12,950	54%
10	0	617	12,956	100%

Re: RMD Tax For Inherited IRA Prior To vs Following Death Of Original Owner

Romper — Wed, 05 Jul 2023 12:27:06 GMT

Thankyou NCperson

I now understand the process.

Thanks for the smoothing suggestion, I am aware of the potential tax hit and SS Part B increase if a large distribution were taken in one year.

Re: RMD Tax For Inherited IRA Prior To vs Following Death Of Original Owner

NCperson — Wed, 05 Jul 2023 12:30:48 GMT

<<SS Part B increase>>

you mean IRMAA for Medicare? that only impacts those on Medicare. it has no impact on SS payments.

Re: RMD Tax For Inherited IRA Prior To vs Following Death Of Original Owner

Romper — Wed, 05 Jul 2023 12:40:37 GMT

Sorry, my mistake. I knew that 🙄