I was talking about the penalties that would result if the beneficiary continued to ignore distribution requirements and didn’t fully distribute the account in the 10th year.
AJ
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Have you suggested QCDs to them?
AJ
- I suspect that most of the people with $1M+ will seek out at least some sort of advice in their later years.
- I think the bigger concern is that very often the advice people get is bad advice. For example, my dad had an elderly distant relative with a stock portfolio that had holdings many decades old, and they comprised almost all capital gains. She was clearly dying and was in the process of “putting her affairs in order”, and about 3 1/2 months before she died, this advisor sold ALL the stocks she had inherited from her husband (a few million $) and put all of it into bonds! What a fool this advisor/money manager was! As non-heirs, It didn’t affect us in any way, but it created a MASSIVE capital gains tax bill on her last tax return. It was perhaps the least tax efficient way of handling it.
- Heirs, especially unsophisticated ones (“unsuspecting benes”), when inheriting money usually want it RIGHT NOW. So the danger of them withdrawing it ALL in the first year is a lot higher than the danger of them waiting 10 years.
- And the above type of heirs will often spend it quickly and not even reserve enough for the taxes that are due. This is likely a much bigger danger.
- Europe and Asia handle these things far better than the USA does. They generally require that the institution holding the funds ascertain the beneficiaries status, and they (the institution) are required to distribute the correct amounts by the correct dates and withhold the correct amount of tax, etc. In fact, almost all taxation is done at the source in those countries. The banks withhold what is owed, and most of the time no tax return needs to be filed unless there are unusual circumstances (like a business that needs to be valued, or some other rare exception, etc).
- I think at a minimum, the US should have a regulation that when a T-IRA account is “retitled” into a heirs name, the firm holding the funds MUST, on their own, distribute the entirely of the funds by the 10-year mark. At least that would prevent unsuspecting beneficiaries from being hit by penalties that they know nothing about. And heck, same for RMDs, the firm should be required to distribute the required RMD on the last day of the year if the owner hasn’t done so manually.
I guess I don’t see a reason for the RMD rules to require that schedule, though. Beneficiaries are free to implement a schedule that best fits their situation, as long as it meets any RMD requirements. And that’s what advisors should be discussing with their clients, instead of complaining about complexity of RMD rules that aren’t really that much more complex than they used to be. There wasn’t any discussion in that article about the fact that most beneficiaries will be better off from a tax perspective by taking distributions that are larger any prescribed RMDs.
AJ
Now that I think about it some more, this couldn’t possibly work. The person may have taken their RMD distribution from a DIFFERENT IRA at a different firm. Meh!
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I suspect, with 7 figure IRAs, if one of the parents dies more than a year before the other, the surviving parent will also get hit with higher rates than what they saved by contributing to their 403(b)s. And even while both are still alive, the parents may very well get hit with higher tax rates due to their own RMDs. So, it’s not just inherited IRAs.
That’s the problem with kicking the tax deferral can down the road - eventually someone will pay, and the rate may be higher.
That said, I still see the complaints as being mostly with the requirement to fully distribute an inherited IRA within 10 years, which was a revenue trade-off put in place as an offset to increasing the RMD age in SECURE 2.0. I will also point out that SECURE 2.0 was pretty bipartisan, passing 414 - 5 in the House and 68 - 29 in the Senate.
AJ
Ya, they do a little but not enough to matter. They are not overly interested in giving that much to charity. 
Heh, the law isn’t REALLY problem. The problem is in the details - which Congress left up the the IRS. And, why it was taken us 4 years to get to this point (IRS couldn’t figure out how to implement the law). Just a guess, but the law may have had less support if Congress had to approve these details.
Keep in mind, you are coming to this from the perspective of a professional that deals with taxes daily. Many/most beneficiaries may simply lack the temperament or the wherewithal to manage a 10 year schedule without assistance.
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That would be great, but I don’t see that happening - as we could have that rule in place already back when the excise tax was a 50% penalty for failure to take the RMD.
Then it sounds like either they need to deal with paying tax rates over what they saved when making contributions, or they will leave that problem to their daughter. That’s their choice, now that SECURE 2.0 has required total distribution within 10 years.
The RMD details is what was left up to the IRS. The 10 year total distribution has been clearly stated in the law, doesn’t need any IRS interpretation and has been in place since the law was implemented. Since, as already discussed several times in this thread, most beneficiaries have a greater tax impacts from the requirement to totally distribute the account within 10 years than they will from RMDs, how is it NOT the law that’s the problem?
Really? Where did you get the idea I’m a professional tax preparer? I’ve been a volunteer tax preparer with TaxAide, but never been paid to prepare a tax return in my life. I’m a retiree with a BSEE and an MS in Management, with a background in forecasting and budgeting for call centers.
As @MarkR pointed out, there’s probably more of a tendency for beneficiaries to withdraw the entire amount in the first year or two, so there’s not that many who will end up having to manage a 10 year schedule. While some of them may have been better off taking 10 years to withdraw, it may be like people taking SS at 62 - they either need it, or they don’t have the patience to wait. But that seems to be more of a societal issue with how Americans handle their finances overall, not particularly with inherited IRAs.
AJ
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I don’t regret having large tax-deferred accounts despite the fact that I might end up paying more in taxes. Tax deferred saving comes with poverty insurance. If I had ended up with a meager retirement, I would be much happier having saved on taxes and getting some more dollars. The price is higher taxes when, frankly, I just don’t need all those dollars.
Like all good insurance, you get money when you need it most and take a loss if you never need it. It could easily have turned out differently, career ending injuries, kids with high medical costs, etc.
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Something I really appreciate about having most of my savings in an IRA (and the rest in a ROTH) is the simplicity. Nothing to think about come tax time. Never worrying about capital gains, and when to sell what to control that. Will I - or my daughter - pay more taxes in the end? Sure, if I’d done exactly the same investing outside the IRA as I did inside, but I wouldn’t have. To say nothing about not being able to spend that savings until I was retired.
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This! Uncomplicated retirement is the ‘only’ retirement worthy of the name.
JimA
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