Inherited IRA RMD - 1st Year?

Yes, that has always been the case. The total RMD that was required for the decedent in the year of death must be taken by some combination of the decedent and the beneficiaries.

As with many tax-related issues, it depends. I will answer for non-spouse beneficiaries, since that seems to be what you are asking about:

If the owner died on or after their RMD beginning date, then a non-spouse beneficiary must take RMDs during the 10 years. IRS Pub 590-B p590b.pdf (irs.gov) has an explanation on how to figure the RMD. That said, even taking the RMD may still result in a very large distribution, with a consequently very large tax bill, the final year, so they may want to take more than the RMD amount.

If the owner died before reaching their RMD beginning date, then no RMDs are required during the 10 years, so they could potentially wait until year 10 to take the total balance. That said, that could be a very large tax hit, and they may pay less in overall taxes by taking out some each year for the 10 years, even if they’re not required to do so.

SECURE 2.0 gave some clarifications on who was required to take RMDs, and also granted beneficiaries exemptions from taking RMDs in 2021 and 2022 because the original SECURE Act wasn’t totally clear. (2020 was already exempted due to one of the COVID laws, but I don’t remember which one off-hand.) The information I gave in this post is consistent with SECURE 2.0

AJ

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Reading over this a thought came to me.

It would be a kindness to my beneficiaries if, once I have to start taking RMDs, I take them first thing in the year, each year. Assuming I don’t pass before the markets open in January it could save them a bit of confusion.

Hmm…that’s an interesting thought. I know my mother took monthly RMD distributions, but she died at the end of December, so her RMD for the year was complete. If she had died prior to taking her entire distribution, it wouldn’t have been hard to calculate how much was left to take. The problem would have been getting the transfer to the accounts for me and my siblings in a timely manner. If she had died at the end of November instead of the end of December, I’m not sure we would have gotten it done in time. So, yes, it does seem like a good idea.

AJ

I think that also means you should pay estimated taxes for your RMD in Q1. Nothing wrong with that, but this board seems to have a lot of people who jump though hoops to delay taxes.

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That raises a question for me. The way I’ve handled all my IRA withdrawals is to have both fed and state withheld as part of the transaction. I have never done any quarterly anything, and may well have been dinged for that. A brief summary of what I’m letting myself in for would be appreciated. When RMD kicks in the amounts will be much higher than what I’ve been withdrawing. Thanks!

It depends. If your RMD is large enough, you could actually just have your entire safe harbor amount withheld from your RMD, and then you don’t have to pay quarterly estimated taxes at all. That will also make it easier on your heirs when they have to file the tax return for the year you die.

Well, if that’s their goal, then they should not pay quarterly taxes, and instead, wait until, say December 15, to take their RMD, and having enough withheld to meet their safe harbor amount. Sure, they didn’t get to wait until Jan 15 (a month later) to make the 4th quarterly payment, but then again, they also didn’t have to make their April, June and September quarterly payments, which means on average, they will have waited longer to make their tax payments.

So it comes down to - do you want to wait to give the government the money you need to pay them, or do you want to make it easier on your heirs? That’s obviously a decision that each taxpayer needs to make for themselves.

AJ

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As long as what you’ve had withheld from your withdrawals (and any other withholding you’ve had) meets your safe harbor amount, you won’t be dinged. If the amount you’ve had withheld didn’t meet your safe harbor amount and you’ve had to pay taxes when you file, then yes, you may have had to pay an underpayment penalty.

If you’re not able to decrease other ordinary income (like Roth conversions) to offset the additional withdrawal, you will owe more in taxes. The first year that can be taken advantage of by just paying your safe harbor amount out of your RMD, since the safe harbor amount will be less than what you owe. You will just need to be sure to have enough liquid to pay the additional taxes when you file your return for that year.

For future years, if you have at least half of your account(s) requiring RMDs allocated to stocks, on average, your account(s) will continue to grow for the first 10 - 15 years of RMDs, despite taking out the RMD, since the RMD will be less than the growth. That means that with both the account balance and the RMD percentage increasing, even when offset by bracket inflation adjustment, you may actually owe more in taxes each year. If that’s the case, then the safe harbor amount you will need to have withheld from your taxes will need to increase each year, and you will still need to pay some taxes when you file each year.

When you reach the point where the growth in your account(s) isn’t outstripping your RMD amount (probably in your mid-late 80s if you are getting a 6% - 8% overall return on your account(s)), the balance(s) in your account(s) will start declining. Since your RMD percentage will still be increasing, you may or may not end up owing more in taxes than your safe harbor amount. You will probably get refunds some years, and owe in others.

In your final years, especially if you have increased medical costs, it may be that your RMDs are mostly or completely offset by deductions. I would still recommend to pay your safe harbor amount - but that could decrease significantly from prior years.

I will also point out that you probably won’t know your actual safe harbor amount until you actually file your taxes, so having a safe harbor amount withheld from an RMD taken in January may require some adjustment. If you didn’t have enough withheld to meet your safe harbor, that adjustment can be made when you file your taxes, either by having some of any refund applied to your next year’s taxes, or by making an estimated payment when you file. If your safe harbor amount was less than what you had withheld, then you’ll either owe less in taxes when you file, or will get a refund.

Now - all of this projection is based on current tax law, and assumptions that the markets will continue to perform similar to how they have performed in the past. When it comes to predicting tax law and market performance, my crystal ball gets cloudy, so take this all with a very large grain of salt.

AJ

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Thanks AJ for taking the time to lay all that out.

So far I have always received a refund. Nothing is withheld from SS or pensions, but all IRA withdrawals are at my max bracket. The over withholding there more than covers the other income when deductions are factored in. Yes, that is a simple-minded approach. I like simple.

Thankfully I only have a single IRA account, so I don’t have to worry about averages.

Once I start RMDs that will be more than I need to live on, so I will probably start investing the excess outside the simplified IRA/ROTH world and finally have to think about things like capital gains. Or start passing it along, within the $18k gift limits.

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Once you hit 70 1/2 (so before the current RMD age), you can do QCDs up to $100k a year, if you are charitably minded. Once you reach RMD age, the QCDs will count towards your RMD. The nice thing about QCDs is that they don’t count toward your income, which means that you don’t have to get to the itemized deduction level to get a tax advantage from making charitable contributions.

AJ

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That happened June of last year, 2023. I will hit 73, the current magic number, in December 2025. At least that’s the plan. :sunglasses:

I do itemize, but worth understanding none the less. Most of my support goes out as monthly payments handled automatically by my bank, to local organizations that I think do better with a steady income rather than an occasional lump donation, so it is a good thing I can itemize.

Thanks again.

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aj, you’re awesome! Thank you for the clear response. I understand all the disclaimers on tax burden, but I’m going to try to help my sisters understand it as well. This helps a lot.

The way that I helped my brothers with this issue was to tell them:

You currently have 10 years left, so you should take out 1/10, or 10%.
Next year, you will have 9 years left, so you should take out 1/9, or 11.1%
The following year, you will have 8 years left, so you should take out 1/8, or 12.5%
Then, 1/7, or 14.3%
Then, 1/6 or 16.7%
Then, 1/5, or 20%
Then, 1/4, or 25%
Then, 1/3, or 33.3%
Then, 1/2 or 50%
The last year you have to take it all, or 100%

AJ

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I came here looking for answers on this very question and see aj485 had already answered it perfectly. Thanks, AJ!

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