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- Manlobbi
Personal Finance Topics / Tax Strategies
No. of Recommendations: 1
I apologize if I posted this previously over at TMF but things have been chaotic and I honestly don't remember. I've read and asked a number of people including CPAs and have received different answers. I also asked an older relative who is very good in financial matters and his conclusion was similar to mine 'This is confusing and you see contradictory opinions.'
My father passed away in December 2021. I inherited several accounts but the one I'm trying to understand is his 401K/IRA. This was a tax deferred account they he put into Vanguard and left it there for years. When he passed away he was 84 and had completed his RMDs for 2021.
I thought the rule was that I had until 10 years after his death to withdraw the money and pay taxes on it. And I could withdraw any/all of the money at any point during the 10 years. I'm nearing retirement and my original plan was to wait a few years and then start withdrawing money in my mid 60s prior to us collecting social security. Probably in the 62-65 range.
I've seen other people say you can't wait to withdraw but instead have to take some kind of RMDs (which leads to what amount those have to be) each year.
I've read one tax web site that seems to clearly say the RMDs is the way you have to go. Reading the IRS information is very confusing and not clear at all. I also see that for 2021 and 2022 you definitely don't need to do the RMDs but it was unclear to me which situation the IRS was referring to. I realize there is also a category that I think they called qualified beneficiaries which seem to be children with various issues, etc. and I don't fall into that category.
Does anyone know for sure what the correct answer is? A bonus question is how does the situation change if you inherit the account from a non-parent/spouse relative (e.g., uncle/aunt)?
Thanks
Rich
No. of Recommendations: 1
You have to drain the account within 10 years, in your case, that would be by 12/31/31. You can take distributions of any amount in each of the 10 years, but the account (Inherited IRA' account) has to be drained by the end date. You can take 1/10 each year, you can take all of it in the last year, you can take 1/3 in each of the last 3 years, etc. And the money can grow tax-deferred for as long as it remains in the account.
The situation only changes if you are the spouse of the decedent, or if you are a minor child of the decedent, or if you are less than 10 years younger than the decedent. There are a few other exceptions for disability, etc.
No. of Recommendations: 2
the one I'm trying to understand is his 401K/IRA.
The first thing to clarify is here. Is this an IRA or is it a 401k? They are different plans with different requirements. It doesn't matter what it used to be. The question is what is the account today? When you look at the most recent account statement, is it from the XYZ company 401k plan? Or does it say Rich's Dad IRA?
--Peter
No. of Recommendations: 0
The first thing to clarify is here. Is this an IRA or is it a 401k? They are different plans with different requirements. It doesn't matter what it used to be. The question is what is the account today? When you look at the most recent account statement, is it from the XYZ company 401k plan? Or does it say Rich's Dad IRA?
Definitely was in my father's name and not the company.
No. of Recommendations: 2
I thought the rule was that I had until 10 years after his death to withdraw the money and pay taxes on it. And I could withdraw any/all of the money at any point during the 10 years. I'm nearing retirement and my original plan was to wait a few years and then start withdrawing money in my mid 60s prior to us collecting social security. Probably in the 62-65 range.
I've seen other people say you can't wait to withdraw but instead have to take some kind of RMDs (which leads to what amount those have to be) each year.I have done a little reading on this, since I'm my Mom's executor and she'll be 90 in a coupla months. I am definitely no expert. But my understanding is that there are differences between the rules for an inherited IRA's and Roths regarding the 10 year redemption requirement. Both types of inherited IRAs have to be liquidated in 10 years. I believe that for inherited Roths, the money can be left in until the last day of the 10th year, but for "regular" IRAs, i.e. those that were funded with pre-tax dollars, there is an RMD requirement.
From the Schwab site: [for] Traditional IRA* [where] death of IRA owner [is] on/after required beginning date (*Also applies to SEP and SIMPLE IRAs)
The beneficiary must withdraw a minimum amount each year beginning in the calendar year following the year of the IRA owner’s death. The annual distribution is generally based on the beneficiary’s single life expectancy, nonrecalculated.
As a Non-Eligible Designated Beneficiary, in addition to taking minimum annual withdrawals, the entire Inherited IRA must be depleted no later than December 31 of the tenth year following the IRA owner’s year of death.
Note: A distribution in the year of the IRA owner’s death must be withdrawn by the beneficiary if the IRA owner did not withdraw the RMD before death. I take that to mean you look at your own single life expectancy table, and determine the RMD each year, and if there is any money still in the inherited IRA, it needs to be withdrawn prior to December 31st of the 10th year. That means you would have a big tax hit in the 10th year if you only took out the RMD amount in years 1-9.
The Schwab site goes on to talk about Roth IRAs:
The beneficiary is subject to the 10-Year Rule. Under these circumstances, with the 10-Year Rule, a beneficiary may take withdrawals as slowly or as quickly as they wish provided all funds are withdrawn by the end of the tenth year following the year of the IRA owner’s death. There is no schedule for how payments must come out, but the entire IRA must be depleted by December 31 of the tenth year. https://content.schwab.com/ira/understand-iras/ira... Tails
No. of Recommendations: 1
I take that to mean you look at your own single life expectancy table
For a single non-spousal designated beneficiary, I believe that's correct, with the caveat that you only look at the table once. Subsequent years you just subtract 1 from last year's divisor to get the new divisor (which is different than how RMDs for your own IRAs work).
Brian
No. of Recommendations: 0
This is what the IRS itself says about Non-Eligible Designated Beneficiary withdrawals from a TIRA (
https://www.irs.gov/retirement-plans/plan-particip... ):
Non-spouse beneficiary options[eligible designated beneficiary rules]
...
Designated beneficiary (not an eligible designated beneficiary)
Follow the 10-year rule
10-year rule: If a beneficiary is subject to the 10-year rule,
Empty the entire account by the end of the 10th year following the year of the account owner's (or eligible designated beneficiary's) death
Relief under Notice 2022-53 for beneficiaries subject to the 10-year rule
The IRS will not treat a beneficiary of an inherited account in a plan or IRA who was subject to the 10-year rule and who failed to take an RMD for 2021 and 2022 as having failed to take the correct RMD
There's nothing in there about needing to take RMDs, even if the decedent had already started them.
I wish ptheland or aj485 or Ira were here.
Eric Hines
No. of Recommendations: 2
I wish ptheland or aj485 or Ira were here.
Eric Hines
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Yep. Not only did I get authoritative answers to my questions, just reading their answers to other peoples questions was interesting and enjoyable.
No. of Recommendations: 1
Designated beneficiary (not an eligible designated beneficiary)
Follow the 10-year rule
10-year rule: If a beneficiary is subject to the 10-year rule,
Empty the entire account by the end of the 10th year following the year of the account owner's (or eligible designated beneficiary's) death
Relief under Notice 2022-53 for beneficiaries subject to the 10-year rule
The IRS will not treat a beneficiary of an inherited account in a plan or IRA who was subject to the 10-year rule and who failed to take an RMD for 2021 and 2022 as having failed to take the correct RMD
There's nothing in there about needing to take RMDs, even if the decedent had already started them.
I wish ptheland or aj485 or Ira were here.
Eric Hines
You definitely have to take the distributions yearly (but see below). I went through this confusion a few years ago when I passed away and talked to some very knowledgeable people at the bogleheads forum.
You are correct in noting that the IRS has decided to avoid penalizing anyone who has yet to take RMDs. No one knows whether that will continue, or whether they will allow the 10 years to be extended. If not then a person could find themselves having to take the money out over a shorter period of time which could hurt them tax wise.
No idea why they can't issue a final ruling on this. For me I'm doing the RMDs since I want to transfer the money prior to us (my wife and I) starting social security. Currently we can control our income the next few years, then a couple of small pensions kick in, and then social security.
Morningstar (no paywall for these) had a couple of good articles on this.
https://www.morningstar.com/retirement/clearing-up...https://www.morningstar.com/financial-advice/how-1...Of course this seems to constantly change as:
https://www.morningstar.com/news/marketwatch/20240...This (inherited RMDs) used to apply to both IRA and Roths but apparently now it does not.
And this morningstar article had some examples of how this works (for non-spouses):
https://www.morningstar.com/financial-advice/who-d...So if it pays to wait, maybe you can continue to do so until the IRS gets to a real final decision.
Rich
No. of Recommendations: 1
aj is still at tmf. If you can find the tax board, she still posts there.
I think she made an appearance here, but it's probably too quiet here to be with her time
No. of Recommendations: 0
Not on SS, but you have to worry about irmaa. I need to distribute Mom's IRA before 2026, or the proceeds will be used in my first irmaa calculation.
Check the IRS notice, but I think the limit on ordinary income to pay no cap gains is now ~$94k MFJ.
No. of Recommendations: 3
I went through this confusion a few years ago when I passed away and talked to some very knowledgeable people at the bogleheads forum. - RichinMD
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I didn't know the bogleherds conducted seances.
