RMD, inherited IRA
Trying to decipher RMD rules, here is the situation. Taxpayer was born in 1942, so turns 79 in 2021. Has his how IRA, I have that part clear. But spouse, who was born in 1948, died in 2020; spouse had $ in both a traditional and a Roth. Taxpayer was the beneficiary & that money is in a Benef IRA. My understanding is that the taxpayer (the survivor) has 10 years to empty both the Benef Traditional and the Benef Roth accounts. is there a requirement to take annual distributions over the 10 years, or simply a requirement that it be emptied by the 10th year?
Permalink Submitted by Alan - IRA critic on Wed, 2021-02-10 22:25
The spousal rollover remains available, therefore the taxpayer should elect to assume ownership of both inherited IRAs, and will be treated as if he owned them the entire year of 2021. His RMD will be calculated using the Uniform Table with the value of the inherited IRA on 12/31/2020. He can also combine his prior IRA with the new IRA since he will be the owner of both, and the RMD divisor will also be the same.
When he elects ownership of the inherited Roth IRA, there will be no RMDs since Roth owners are not subject to RMDs. If his wife made her first Roth contribution prior to 2017, his Roth will be qualified and fully tax free.
Therefore, his options are much more favorable than you thought. He is subject to the one rollover rule, and the election of ownership and subsequent direct transfers into his own IRA are not treated or reported as distributions, and therefore do not count toward the rollover limitation.
Permalink Submitted by Gregg Lynch on Thu, 2021-02-11 02:03
Thanks Alan; hadn’t thought about him moving the Roth to “his” ownership to avoid the required distributions from it. On the traditional, I’d like to pick your brain a bit more (not so much for this one, but for anyone else I run across in the future where the beneficiary is non-spouse). I know the new rule is that it has to be emptied within 10 years; is there an RMD requirement in each of the years, or could someone choose to take nothing out for 9 years, then take all of it in year 10?
Permalink Submitted by Alan - IRA critic on Thu, 2021-02-11 02:45
If subject to the 10 year rule, there is no annual RMD for any year until the last year when the RMD is the entire balance. But an inherited IRA might be distributed gradually anyway to avoid the tax hit if the beneficiary waits untll year 10 and takes a large distribution. But this is not an issue for an inherited Roth IRA, since the distributions are tax free. An inherited Roth therefore is best left until the final year to give it more time to generate tax free gains.
But not all non spouse beneficiaries will be subject to the 10 year rule. There are certain classes of “eligible designated beneficiaries” (EDBs) who can still stretch the IRA over their life expectancy. For example, beneficiaries not more than 10 years younger than the owner are EDBs, as well as chronically ill or disabled beneficiaries, minor children of the owner until age of majority, and also spouse beneficiaries who choose to delay the spousal rollover, usually until 59.5.
Permalink Submitted by Gregg Lynch on Thu, 2021-02-11 12:30
Thanks so much, Alan. I’ve had a difficult time finding an answer to the question of whether you can kick the can down the road & pull it all at once, or maybe spread out over the last two or three years. I can see a few oddball situations where it could make sense to do that.