Yet another inherited IRA question!

Submitted by James Peach on Fri, 2021-08-20 20:27

I would like to think these are easy questions. We will see.

I inherited an IRA from my mother in 2017. I am 50 years old.

— do I need to have the account emptied by December 31, 2022 (or some other year/date?)

— am I required to take a RMD every year or can I wait and simply close the account in 2022?

— if a RMD is/has been required, was the requirement in 2020 paused?

— since the estate took nearly a year to settle, it wasn’t until 2018 that I actually received the IRA; I believe I did take a distribution for tax year 2018 but did not in 2019; am I on the hook for a 50% penalty of the RMD for 2019? If so, how/when will it be assessed?

Thank you in advance for any help / answers!

James



Submitted by Alan - IRA critic on Fri, 2021-08-20 21:53

If your mother left the IRA to her estate, the 5 year rule does apply if she passed prior to the start of her RMDs, known as the RBD. Technically, that RBD date is 4/1 following the year she would have reached 70.5. If she passed on or after that date, then your beneficiary RMDs are based on her remaining life expectancy, not yours. That will make the RMDs larger than if you had been named the beneficiary on the IRA agreement. 
You need to determine which of the above RMD rules applies to you. If the 5 year rule applies, the inherited IRA must be drained by 12/31/2023, as 2020 is not counted, and no RMDs are needed before 2023. If her life expectancy applies then you need to compare what you distributed in 2018 to the required amount, and if less make up the difference. Then take the 2019 beneficiary RMD, and this year’s. If 2018 fell short you must make up the difference and file a 2018 5329, and also a 2019 5329. 2020 RMD not required. The IRS almost always waives the penalty if you file a proper 5329. There are only 4 lines to complete, but they are not intuitive. Check the 5329 Inst carefully to determine what goes on each line. Late RMDs are always taxed in the year received, so you do not have to amend any older returns.

Submitted by James Peach on Sun, 2021-08-22 00:51

Thank you for the knowledgeable reply.  I have some research to do it seems.  My mother was in her 80s when she died so I guess she had been taking annual RMDs but I don’t know and not sure how to find out.  Executor of the estate maybe?  Not sure who was the beneficiary on the IRA.   Thankd

Submitted by Alan - IRA critic on Sun, 2021-08-22 03:34

The estate and executor would only deal directly with this IRA if the estate was the beneficiary. That appears to be the case here, that you inherited through the estate which means she had a will in which you were the beneficiary under the will, or if no will then the state intestate provisions would apply in determining who inherited the IRA. Usually, those laws result in an estate IRA going first to the spouse, and if no spouse then to the children in equal shares. But you clarified that she passed after her RMDs had begun, which removes the 5 year rule from consideration. Apparently, the executor assigned the IRA out of the estate to the estate beneficiaries, perhaps just you or maybe some others as well. That is the process that results in your having your own inherited IRA to manage. 
Having passed after RMDs began, the beneficiaries of her IRA are responsible for completing her 2017 RMD if she did not complete it before passing. Perhaps the executor took care of that, but the executor should be able to answer that question. Whether she completed RMDs before 2017 is not something that beneficiaries need be concerned with, just the year of death RMD.
Each year’s beneficiary RMD is based on the year end balance of the prior year. Maybe the executor can help with that also, or if you inherited the entire IRA, the custodian of that IRA could provide that info. 
 
If all of the above is correct, then your annual RMDs are based on mother’s remaining life expectancy as of 2017. You are treated as inheriting on her date of death, not when the IRA was set up or when you became aware of it. Table I in Pub 590 B lists the divisors. For example, if she was 84 at the end of the year she passed, the divisor for 2018 would 7.1, then 6.1 for 2019, no RMD for 2020, and 4.1 for 2021. The original divisor is reduced by 1.0 for each year after the first RMD year.

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