Inherited IRA RMD for Non-Spouse Beneficiary under New Proposal
Reading through today’s first Mailbag question, I started to think about the following scenario:
If the adult child of the 80 year-old parent inherited the IRA in 2020 and did not take a distribution in 2021 (as the new proposal was not in effect), would the adult child have to “retroactively” take a distribution for tax year 2021 this year, in addition to the RMD for 2022? Also, under the new proposal, which table would the beneficiary use to calculate RMDs for the 10 year period?
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-03 17:24
I don’t think there is any chance that the IRS would expect the beneficiary to have taken an RMD for 2021 given the number of times the IRS has changed course on this. There is also a chance that this provision and a few others will receive enough blowback from informed commenters that the final Regs may differ. To your question though, the former single life table effective in 2021 would determine the 2021 RMD, then the divisor would have to be reset to the new single life table for 2022 and beyond. Finally, note that these annual RMDs will considerably lower than distributions planned to equally drain the inherited IRA over 10 years, and in addition they will not apply to inherited Roth IRAs since all Roth owners pass prior to RBD.
Permalink Submitted by Alexander Theodore on Thu, 2022-03-03 21:32
Thank you! I would think it would be extremely difficult and burdensome to implement the annual RMD + 10 year rule. Assuming the new regultions are implemented, do you think for someone mentioned in the scenario above, Year 1 (2021) is just a wash, and RMDs will have to start for years 2-9 (with remainder in Year 10)?
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-03 23:47
Yes, that is most likely. At least one benefits manager states the following:
“The Treasury decided to completely rewrite and reformat all the RMD regulations—to the tune of 275 pages of information. In addition, the Proposal updates rollover regulations, which date back to 1995. While these changes are only proposed (and the Proposal does not provide that practitioners may rely on this guidance pending finalization), the planned effective date is January 1, 2022. Distributions taken in 2021 can be based on a reasonable interpretation of the law.”
Permalink Submitted by Alexander Theodore on Fri, 2022-03-04 15:19
Great insight! Thanks so much!
Permalink Submitted by David Mertz on Fri, 2022-03-04 15:56
The more I think about it, the more the proposed regulations make sense if you ignore the complexity. Not requiring annual RMD when the decedent dies before the RBD allows all of the funds to remain in an inherited Roth IRA until the 10th year, which helps preserve the benefit of tax-free growth but still limits how long the Roth IRA can remain undistributed, a somewhat equitable tradeoff between the old and new rules. Requiring annual RMDs for decedents dying after the RBD means that an inherited traditional IRA will not be drained any less rapidly than it would have been under the old rules.
Permalink Submitted by Dan Zaehring on Fri, 2022-03-04 23:31
I have long since ceased to expect to make “sense” of tax rules–they are what they are. If the clear reading of the statute and congressional intent is not forthcoming, then the ambiguity will be argued out between the various feasible interpretations. The unfortunate aspect is how easily the IRS can deal out “retroactivity” for their late conclusions, while the real world offers no do-overs.
Permalink Submitted by Alan - IRA critic on Fri, 2022-03-04 23:55
Agree, but that is why the IRS routinely waives excess accumulation penalties. Inherited plan RMDs have never been actively monitored by the IRS. They trust qualified plans to usually be correct, but not IRA custodians who vary considerably in their success, cannot force out distributions, and therefore IRA inherited IRA RMD enforcement has always been dysfuntional. Add additional complexity with Secure, and the results will be interesting.