RMDs for unusual situation
My father died last year and left his IRA to my brother and myself. The IRA was split in half into two inherited IRAs, one for my brother, one for me. My father had begun taking RMDS.
My brother died in april (so, around 5 months after my dad). He was not yet 50 (a couple years older than me) and had no spouse, child or beneficiary named to the IRA. I was his sole beneficiary. I transferred his half into an inherited IRA into the name of his estate. But then when probate ended- since my accountant said there wouldn’t be an issue with RMDs since it was the same depositor – combined that Inherited IRA with the other half from my father. (i am learning now that seems to be incorrect, that i should have kept them separate).
Regardless, it is done and I wondered about RMDs and what happens next.
1. On RMDs: What should i do about the RMDs for 2023? (should i base it on what my father had been taking out, aiming to empty within 10 years?
2. What else should I do? Is there some other step i should be taking with the IRS or my financial institution to help remedy whatever can be remedied?
Note: I’ve been so dismayed at the complexity with inherited IRAs. Even my financial institution had varied widely in the options and recommendations they’d given me (They’d also told me at first there shouldn’t be a difference between combining or transferring my brother’s half into a separate inherited IRA account). Many very smart people i have talked to (including estate lawyers and tax people) seem to just not be fully read in to all the different (and changing) rules and it seems impossible to not make a mistake. I thought I’d ask here if there are steps I should take so i can take that information to my tax guy since i think this isn’t a situation most people have faced before.
Permalink Submitted by David Mertz on Wed, 2023-12-06 13:23
If the inherited IRA inherited from your brother had been kept separate you would have just continued his distribution schedule for that account. Since your brother was older, I think you would be fine taking annual RMDs from the combined inherited IRA based your brother’s age rather than your own age because it will result in a larger total distribution than if you had not combined the inherited IRAs. (This is what would have been required had separate accounts not been established.) You probably want to take more annually than this RMD anyway so that you don’t have an exceptionally large distribution in year 10 when any remaining amount must be distributed. Since the IRS waived the penalty for not taking a 2023 beneficiary RMD under the 10-year rule nothing needs to be taken in 2023.
Permalink Submitted by Linda Lacina on Sat, 2023-12-16 09:56
Thank you so much for thisSo, just to be sure I’m understanding, i would be eligible for the RMD waiver in 2023? I ask because I was my father’s designated beneficiary but in the case of my brother, he had no beneficiaries, so the estate was the default initially. Again, the 2 halves of my father’s roth and traditional are now combined (the half i inherited as designated beneficiary and the half initially put in the name of the estate but now assigned to me as my brother’s sole beneficiary). I wasn’t sure if whether there was or wasn’t a designated beneficiary made a difference to qualify for the waiver. The guidance from the IRS speaks to designated beneficiaries [pg 12 https://www.irs.gov/pub/irs-drop/n-23-54.pdf]. Just wanted to check your thoughts on that. thank you again for all your help – i very much appreciate it
Permalink Submitted by David Mertz on Sat, 2023-12-16 13:18
I don’t see where the estate being the successor beneficiary to your brother makes any difference. A successor beneficiary steps into the shoes of the original beneficiary, so if your brother would not have had any penalty for failing to take the 2023 beneficiary RMD, it seems to me that neither would the estate or an heir under the estate as successor beneficiary. Of course you still might want to take a distribution to smooth out the income over the 10-year period.
Permalink Submitted by Alan - IRA critic on Sat, 2023-12-16 16:38
I agree with DMx’s assessment of the inherited TIRA situation. However, this AM you also mentioned an inherited Roth IRA. I assume that you now have a separate inherited Roth IRA and a separate inherited TIRA and the inherited Roth now contains both your original share and your brother’s. Since inherited Roth IRAs under the 10 year rule do NOT have annual RMDs in years 1-9 you could leave it alone until year 10 to generate tax free gains, and the full distribution in year 10 will be qualified and tax free.