Inherited IRA RMD - 1st Year?

Financial Planning Tax Strategies
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I posted this on the Estate Planning board and a few suggested I post it here (which I should have thought of first!)

The real question below is: Can Fidelity be this wrong, or am I just reading their article wrong?

Trying to understand how distributions for an Inherited IRA work related to someone passing away in 2020 or later, with multiple non-spouse beneficiaries.

Fidelity, in the article here: https://www.fidelity.com/learning-center/personal-finance/re… has the following two paragraphs under the option “1. Transfer the assets to an Inherited IRA and take RMDs”:

If the original IRA owner died on or after January 1, 2020

The SECURE Act requires beneficiaries to withdraw all assets from an inherited IRA or 401(k) plan by December 31 of the 10th year following the IRA owner’s death. Exceptions to the 10-year rule include … irrelevant stuff …

If you are listed as a nonspouse beneficiary along with one or more other beneficiaries, it’s important to separate your portion of the decedent’s IRA in your name and then complete your first RMD by December 31 of the year following the original IRA owner’s death. If you don’t meet this deadline, your RMD calculation will be based on the oldest beneficiary’s life expectancy. If that person is older than you are, you will need to take a larger distribution.
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Until that last paragraph, it’s consistent with what I see elsewhere – take everything within 10 years, however you choose. Is there a requirement in a multiple beneficiary situation (say two children) for each to take a distribution in the first year?

Thanks.

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My understanding was the same as everyone on the other board - that there is no RMD, just that it all has to be withdrawn within ten years.

So I googled to a Schwab article that sounded like it agreed with what you read from Fidelity.

https://content.schwab.com/ira/understand-iras/ira-calculato…

The thing is, that article talks about a calculator, but doesn’t have one. It just isn’t there, even though the wording says it is.

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Until that last paragraph, it’s consistent with what I see elsewhere – take everything within 10 years, however you choose. Is there a requirement in a multiple beneficiary situation (say two children) for each to take a distribution in the first year?

When an IRA or any similar retirement plan is inherited, it is split into a new inherited retirement plan for each beneficiary. Two beneficiaries means two new independent inherited IRAs. The actions of each beneficiary are independent and the other beneficiaries have no knowledge of what is done in anyone else’s inherited IRA.

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If you are listed as a nonspouse beneficiary along with one or more other beneficiaries, it’s important to separate your portion of the decedent’s IRA in your name and then complete your first RMD by December 31 of the year following the original IRA owner’s death. If you don’t meet this deadline, your RMD calculation will be based on the oldest beneficiary’s life expectancy. If that person is older than you are, you will need to take a larger distribution.

The irrelevant stuff isn’t completely irrelevant. There are a few exceptions to the 10 year rule and RMDs instead of full distribution within 10 years apply in the exception cases.

Also, a spouse must transfer the plan to their own name or take a full distribution within the 10 years.

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Is there a requirement in a multiple beneficiary situation (say two children) for each to take a distribution in the first year?

Well, in the article, they do talk about beneficiaries of owners who died before 1/1/20, so those rules are applicable to those beneficiaries. But the article probably should have included that paragraph in the section specific to those beneficiaries, rather than in the general article. My guess is that it’s a poor re-write of an article from prior to the SECURE Act.

That said, if the IRA owner was required to take RMDs and had not taken their full RMD for the year that they died, there is a requirement for that RMD to be completed. So even for deaths after 1/1/20, there can be an RMD requirement in the year of the death.

AJ

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I am not a tax professional, but I am in a similar situation. An RMD for the original owner may be required the first year (if the owner died in 2021), but if you are following the 10-year rule, life expectancy RMDs do not apply to the beneficiaries.

My father died in January 2021 and his 4 children are the beneficiaries of his traditional IRA (Vanguard). My father had not taken his RMD for 2021 prior to his death. I asked Vanguard if they could take out the RMD prior to splitting the account into 4 inherited IRA accounts and they said they could not. The Vanguard representative with whom I spoke told me that my father’s 2021 RMD needed to be taken as a distribution but could be taken by any of his beneficiaries. I am not sure this is true after speaking with an estate attorney who recommended that each of the 4 children take 1/4 of the RMD by the end of calendar year 2021. Each of us took at least 1/4 of my father’s RMD from our inherited accounts.

As for the 10-year rule, IRS Publication 590-B on page 11 says “The terms of most IRA plans require individual designated beneficiaries, who are eligible designated beneficiaries, to take required minimum distributions using the life expectancy rules (explained later) unless such beneficiaries elect to take distributions using the 5-year rule or the 10-year rule, whichever rule applies.” So, if you’re using the 10 year rule, the designated beneficiaries do not need to take RMDs using the life expectancy rules.

If the owner of the IRA died in 2021, I think you only need to worry about a first year RMD if the original owner owed an RMD the year they died. (This would not apply in 2020 since RMDs were required). I recommend you read IRS Publication 590-B to find all of the conditions and exceptions that may apply in your case.

I hope to hear from one of the amazing, talented, and very generous experts on this board. I have read posts on this board for many years and I am very grateful for all of the information that has been shared.

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not sure how to edit my above post – should say RMDs were NOT required in 2020

HHP

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not sure how to edit my above post

Posts can’t be edited but you can report your own post and request it be deleted.

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Thanks VKG! I will just leave my correction.

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Thank you all for the most excellent and helpful comments … as I’ve seen happen so often here. A few thoughts …

aj485 said: But the article probably should have included that paragraph in the section specific to those beneficiaries, rather than in the general article. My guess is that it’s a poor re-write of an article from prior to the SECURE Act. That’s a better way of saying what I thought was going on also, so it’s nice to hear someone else thinking the same way.

vkg said:

The actions of each beneficiary are independent and the other beneficiaries have no knowledge of what is done in anyone else’s inherited IRA. Another common sense description of why the Fidelity paragraph is wrong, or simply misplaced.

The irrelevant stuff isn’t completely irrelevant. … Yeah, I probably should have said it was irrelevant to the situation at hand. Just tried to save space in the post.

RHinCT said: So I googled to a Schwab article that sounded like it agreed with what you read from Fidelity. I followed the link to “Identify Beneficiary Options” there and after entering relevant information it took me to a page that said only the 10-year rule was at play. So that’s consistent with my understanding.

holhealthhproc said: The Vanguard representative with whom I spoke told me that my father’s 2021 RMD needed to be taken as a distribution but could be taken by any of his beneficiaries. I am not sure this is true after speaking with an estate attorney who recommended that each of the 4 children take 1/4 of the RMD by the end of calendar year 2021. Each of us took at least 1/4 of my father’s RMD from our inherited accounts. and …

vkg said: That said, if the IRA owner was required to take RMDs and had not taken their full RMD for the year that they died, there is a requirement for that RMD to be completed. So even for deaths after 1/1/20, there can be an RMD requirement in the year of the death.

The situation at hand will be a death in 2022, and we don’t expect this year’s RMD to be taken before then. Can the decedent’s RMD be taken after death, with proceeds to the decendent’s taxable account, which will then be distributed according to will, POD provisions, etc? Or should it be distributed to Inherited IRAs and RMDs taken from those this year as described above?

Thank you again for all the excellent comments. Any thoughts on my last question appreciated.

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Can the decedent’s RMD be taken after death, with proceeds to the decendent’s taxable account, which will then be distributed according to will, POD provisions, etc?

Probably not. Once the administrator is notified of the decedent’s death, they generally freeze the account,
which means no more distributions. Besides that, since the account has named beneficiaries, it’s not distributed according to the will - it’s distributed to the beneficiaries.

AJ

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The situation at hand will be a death in 2022, and we don’t expect this year’s RMD to be taken before then. Can the decedent’s RMD be taken after death, with proceeds to the decendent’s taxable account, which will then be distributed according to will, POD provisions, etc? Or should it be distributed to Inherited IRAs and RMDs taken from those this year as described above?

The administrator will likely force the RMD to be taken at the time the accounts are distributed.

https://www.irahelp.com/slottreport/who-must-take-year-death…
The answer is really pretty straight forward. If the year-of-death RMD was not already taken by the IRA owner, it must be taken by the beneficiary. It is not paid to the IRA owner’s estate, unless the estate is named as the beneficiary. Due to the continued confusion on this point, the IRS confirmed this rule in regulations and in Revenue Ruling 2005-36. By law, the minute the IRA owner dies, the balance in the IRA belongs to the beneficiary, NOT the estate. The estate could have different beneficiaries than those listed on the IRA beneficiary designation form. The fact that the beneficiary does not have to withdraw the entire account the minute after the IRA owner dies does not make the account any less his. The beneficiary will also pay the tax on the year-of-death RMD. It will be reported on the beneficiary’s personal tax return (Form 1040), NOT on Form 1041 (the estate’s income tax return).

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Besides that, since the account has named beneficiaries, it’s not distributed according to the will - it’s distributed to the beneficiaries.

AJ

Hopefully, all retirement accounts have named living beneficiaries.

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The Vanguard representative with whom I spoke told me that my father’s 2021 RMD needed to be taken as a distribution but could be taken by any of his beneficiaries. I am not sure this is true after speaking with an estate attorney who recommended that each of the 4 children take 1/4 of the RMD by the end of calendar year 2021. Each of us took at least 1/4 of my father’s RMD from our inherited accounts.

The estate attorney’s recommendation is cleaner and the better choice. Each beneficiary is responsible for their part RMD including taxes which the 1099-R would report for each beneficiary.

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aj485 and vkg,

Thank you very much for the replies to my followup question. Makes a lot of sense, and the IRS link helps.

I guess I was initially curious how the IRS tracks/confirms that the appropriate RMDs were taken from their Inherited IRAs by the multiple beneficiaries, but the titling of those (with the decedent’s name as a primary part of it) should make that clear. It will be straightforward to determine what the total RMD should be and for each beneficiary to take the appropriate fraction (at least) for this year.

And yes, the beneficiaries are properly set up as desired.

Oh, another question (sorry) … what if one of the beneficiaries takes enough out to meet the RMD of the decedent? Does that mean others would not be required to take their share? Or would (should) they still take the appropriate minimum fraction?

Thanks again.

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Oh, another question (sorry) … what if one of the beneficiaries takes enough out to meet the RMD of the decedent? Does that mean others would not be required to take their share? Or would (should) they still take the appropriate minimum fraction?

Vanguard was correct it doesn’t matter which beneficiary or combination of beneficiaries take the RMD.

This could be complicated if the beneficiaries don’t like each other. How the penalty would be assessed could be complicated.

The other item that was a surprise to me is that the administrator/executor has no right to know anything about the beneficiaries. The court had designated me as the administrator for the estate, but the custodian for the 401K wouldn’t even answer the question if a beneficiary was defined. They eventually transferred it to the estate which means no beneficiary was defined but still wouldn’t state it.

https://www.mariettawealth.com/news/required-minimum-distrib…

Does it matter who takes the RMD?

In the case of multiple beneficiaries, there is no rule on who takes the RMD and as long as the full RMD is taken, there will be no penalty. This can present a good opportunity if one beneficiary wants to liquidate the inheritance while others want to keep it invested. The heir who prefers cash in hand may be able to satisfy the full RMD with their portion, leaving the assets of the remaining beneficiaries invested.

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Oh, another question (sorry) … what if one of the beneficiaries takes enough out to meet the RMD of the decedent? Does that mean others would not be required to take their share? Or would (should) they still take the appropriate minimum fraction?

As long as the total taken out meets the RMD requirement, only one beneficiary has to take the RMD. That said - with only 10 years to fully disburse the account, not taking any money out for one year will result in larger future distributions, and potentially, higher taxes, in order to fully disburse the account. So, unless you anticipate being in a lower bracket within the next couple of years, it’s probably going to minimize taxes in the long run to take an increasing percentage out every year.

AJ

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vkg and aj485 – Thank you for clarifying that any of the beneficiaries can satisfy the RMD. As vkg pointed out, once the individual inherited IRAs are established, the financial institution can not tell any beneficiary what the others are doing/have done. As in most families, one of my siblings is not good with paperwork, phone calls, bureaucracy, etc. It turns out that the other three beneficiaries took the full RMD to make sure we were all covered. If you call the financial institution and ask if the RMD has been satisfied, the institution can only give you information on your own inherited account. They can not tell you if the other beneficiaries have withdrawn any money.

downtownmaggie – As the executor, I contacted the financial institutions (Vanguard, Fidelity, and TD Ameritrade) to get everything started (and send death certificate), but no beneficiary received any money until each beneficiary contacted the institution and went through their process to create an account. I did everything I could to make things as easy as possible for my siblings. There was a lot of hand holding involved.

Another thing that will make things go more smoothly is to make sure the beneficiary designations are in the beneficiary’s current legal names. I have a sister who has been married and divorced several times. She had to provide additional paperwork (copies of driver’s license, marriage certificate) to prove she was the named beneficiary. Again, no one received any money until all of her paperwork was verified.

I am sorry you are in this situation. My father died of a terminal illness after home hospice. It has been a year and I am still resolving issues with the IRS on his 2019 federal taxes and I have submitted paperwork to social security three times for his final social security payment. Each time you call an institution or government agency, be prepared to be on the phone for hours and have something to do while you wait to speak to someone.

Both of my parents grew up poor. They worked hard and saved and were proud to be able to leave us an estate. Settling an estate is a lot of work, but it is a first world problem I am very grateful to have.

HHP

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AJ agree with post - tax planning tip if beneficiary wants to use that inherited IRA money for his or her own retirement account.

So, unless you anticipate being in a lower bracket within the next couple of years, it’s probably going to minimize taxes in the long run to take an increasing percentage out every year.

This tax planning has limited application for benny of inherited
IRA still working.

You max out any 401(k)s or other employer retirement accounts. Plus don’t forget a HSA. If married the spouse could also do that too. If eligible for Traditional IRA could be add to that too. Most personal tax deductions for individuals have little real tax savings with the higher standard deduction in place. But consult your tax pro about legal way to lower taxable income.

This would lower the taxable income on the 1040. Then the benficiary takes taxable distribution (this is NOT a rollover/transfer of any kind) from the inherited IRA to replenish the lower cash flow and also raise taxable income but in a planned manner. Lots of details for this to work but possible to minimize or at least reduce the tax impact.

Unfortunately uncle sam set the rules to try very hard to tax that inherited IRA. This strategy only delays the possible taxes to some time in the future. Tax laws change.

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Rezzing an old (very helpful) thread:

I answered most of my questions perusing this thread from Jan. 2022, but I’d like to clarify one thing on the subject if anyone is willing to entertain it.

I understand that if the deceased was currently taking RMD’s on their IRA but did not take one in their year of death, then the Beneficiaries are required to withdraw that amount from one or a combination of all beneficiary accounts. My question is in regard to the years following; if one were so inclined (and completely ignoring tax brackets for the moment), could one take $0 for 9 years and withdraw the balance in Year 10? (I’m stating an extreme example to ensure I understand whether there continue to be any kind of RMD with the new inherited IRA accounts)

Also, I’m aware that something regarding SECURE 2.0 just recently got implemented and/or clarified, but I’m unsure exactly what that was (and whether/how it pertains to my question).

TIA!