Beneficiary IRAs – two separate questions / issues

Submitted by Alan Myers on Tue, 2023-04-18 20:33

I have to distinct questions about beneficiary IRAs. The easy one (I think) first. I have a couple of clients that inherited an IRA from their Mother who passed last year (brother and sister split Mom’s IRA 50/50). I know they have to take RMD’s each year and the account must be emptied by year ten. The question… since both children are still working full-time, can they roll the RMDs over to Roth IRAs? Would that be deemed a Roth conversion or is this an RMD and a Roth contribution?

Second question…. I picked up another client early this year that has a beneficiary IRA from her mother. Her Mom passed in 2021 and she is not sure she took an RMD last year from the account. I know the IRS was giving some amount of leniency since it took the forever to promulgate the new rules on these accounts but have we missed the deadline for leniency? Am I correct that we need to take an RMD for last year (based on the 12/31/2021 balance) and one for this year based on the 12/31/2022 balance?

Thanks in advance for the assistance!
Alan Myers, CFA



Submitted by Alan - IRA critic on Tue, 2023-04-18 20:53

  1. They only need to take annual RMDs in years 1-9 of the 10 year rule if mother passed on or after her RBD. If annual RMDs are not required because mother passed prior to RBD, they might still want to take annual distributions to prevent a higher tax rate for a large year 10 distribution.  Distributions from a non spouse inherited IRA can never be rolled over and therefore cannot be converted, but they might be used to pay the taxes for a conversion from their own IRAs. Or they could make regular Roth IRA contributions if they have the earned income to do do, and their MAGI is not too high to qualify.
  2. If the second client is subject to the 10 year rule and Mother passed post RBD, the IRS has waived the penalty for not taking annual LE RMDs in 2021 and 2022. All indications are that such taxpayers must take a LE RMD for 2023 based on the proposed Secure Act Regs. And if mother passed after RBD in 2021 and did not complete her 2021 year of death RMD, the daughter was responsible for completing it in 2021.

Submitted by Alan Myers on Wed, 2023-04-19 05:34

This helps a lot with the brother / sister question.  As for the other client, Mom was 87 when she passed so was well past her RBD but died in March so I don’t know if she had taken any or all of her RMD for 2021 or not.  I will have to reach out to the client to see if she can find out about that as well as whether she took a distribution last year (different firm had the account all of last year) or not.  I am still a little fuzzy on the whole “IRS waives the penalty” thing for ’21 and ’22 RMDs.  I presume that if Mom did not complete her RMD for ’21 and daughter did not complete or if daughter did not take an RMD for ’22 (account was at a different brokerage firm last year), I presume this means daughter has to take the RMDs but there won’t be any penalty for taking them late.  We then have to take a distribution for 2023, too, of course.  

Submitted by Alan - IRA critic on Wed, 2023-04-19 15:53

Daughter does not have to make up the 2022 beneficiary RMD as there is no indication that the IRS will require this in Notice 2022-53, in which the penalty was waived for 2021 and 2022. However, the year of death 2021 RMD of mother must be completed by daughter if mother did not complete it. If there was a tax return filed for mother for 2021, that should indicate whether an IRA distribution was taken or not, but further research will be needed to determine what that RMD was. The year end 2020 IRA balance would need to be determined.  If mother did not complete that RMD then daughter must file a 2021 5329 to request that the 2021 penalty be waived.

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