Taking all funds from an NON SPOUSAL inherited IRA

Submitted by Roberta D’Alois on Sat, 2023-10-21 17:22

Thanks so much to those who answered my prior questions. We did the minimum distributions for the past three years. Now we’d like to just withdraw the whole thing — I assume taxes will be taken out from the distribution, but are there any problems and just withdrawing the full amount and putting it into a savings account?

Our main concern is that the advice we’ve gotten so far is that the look back for required distributions may go back three years but it’s possible that it will not. If it turns out that it doesn’t, are there any serious problems we would have withdrawing the whole amount this year? I hope this makes sense and if not, I’m happy to clarify. Thank you so much for your help.



Submitted by Alan - IRA critic on Sat, 2023-10-21 22:03

  • You can withdraw the full amount of an inherited IRA at anytime, but it will accelerate the tax bill as well as creating a higher taxable income for that year.
  • If you completed your RMDs for the past years, there should be no concern about the statute of limitations for missed RMDs. And if you did not complete any past RMDs, taking a full distribution would make up for the missed RMDs and you would then file a 5329 to request the penalty waiver. Not sure if this addresses your concern.

Submitted by Roberta D’Alois on Thu, 2023-11-02 15:16

I get that this would increase our taxable income for the year, and this would be a good year to do that. But I don’t understand is what “accelerating tax bill” means . Thanks for any clarification.

Submitted by Alan - IRA critic on Thu, 2023-11-02 15:48

For any year that you withdraw more than the required RMD you are being taxed sooner than necessary and you also lose tax deferral of any gains that would have been generated in the inherited IRA. That said, withdrawing more than required in a low income year will reduce the amount remaining that would then be withdrawn in higher income years, and would generally be a wise choice. In addition, if you are able to offset the taxes on the amount withdrawn by increasing contributions to your own workplace plan, the amount withdrawn is being effectively substituted in an account you own for which RMDs will be deferred until your 70s and then would be a subject to the Uniform Table, which has lower RMDs than inherited IRAs.

Submitted by Randy Boyle on Mon, 2023-11-06 20:31

My mother just passed (91yrs old) and had money in a Non-Qualified annuity and money (under $2k) in a Qualified IRA at a life insurance company and ($3K) in a Qualified IRA at a Credit Union.1. I am assuming the Non-Qualified funds are tax free including any earnings?2. The Annuities will be disbursed 4 ways (4 dependents), father no longer living, so I assume we will ea have to pay taxes on the IRA if we cash our shares or the IRAs out.  Is it ok to cash out IRA the ($2K) funds immediately and forget all about any RMD for 2023 and the 10-year rule?3. The Credit Union IRA will be disbursed to me and I wanted to roll it over to my own IRA.  If I do would I then pay out RMDs for 10 years or do you think the ($2K) Annuity would take care of any RMDs on the total $5k paid out.  Trying to decide if it would be simpler to just cash the Credit Union IRA out as well. 

Submitted by Alan - IRA critic on Mon, 2023-11-06 21:51

  1. The NQ annuity distribution would be taxable to the extent of any earnings if mother did not already withdraw the earnings. The insurance company will report the taxable amount in Box 2a of the 1099R.
  2. The inherited IRA distributions will be taxable other than to the extent mother made non deductible contributions and reported them on Form 8606. 
  3. A lump sum distribution will take care of any beneficiary RMDs including mother’s year of death RMD if she did not take it before passing. A distribution from a non spouse inherited IRA cannot be rolled over and is taxable. While the 10 year rule applies to the inherited RA with annual beneficiary RMDs, you can always take out the full amount or more than the annual RMDs. Distributions from an inherited non qualified annuity cannot be used to satisfy IRA RMDs. 
  4. These are such small amounts (even smaller if each beneficiary inherited 1/4 of these amounts), it might be worthwhile to simply take  full distributions and be done with it.

Submitted by Randy Boyle on Tue, 2023-11-07 15:23

Thank you for this excellent reply.  One more question…If we just cash out our inherited IRAs would I need to show an RMD taken on my Mother’s taxes for 2023.  You stated that the Lump Sum Distribution would satisfy the RMD but since we will be taxed on these distributions do I need to do anything special on the taxes for my Mother to reflect this since generally she would be taxed.

Submitted by Alan - IRA critic on Tue, 2023-11-07 15:31

No, all distributions included year of death RMDs that are distributed to beneficiaries are reported as income for the beneficiaries. These distributions are not reported on mother’s final tax return, only distributions she took prior to passing. A 1099R will be issued to the beneficiary for all distributions taken by the beneficiary.

Submitted by Randy Boyle on Sat, 2023-11-18 18:31

I had to get a EIN to get the funds (<$10K) from my Mother's credit union so they could take those Revocable funds out and put into a Irrevocable Successor Trust (with this EIN) with me as the Successor beneficiary.  When I got the EIN online fromt the IRS it stated that I need to file a 1041.  Is this in place of the 1040SR I usually did for my Mother?  Are there some simple instructions as to how to fill this out (sorry, but IRS instructions are horrible).  Altogether we got about $44K in a non-qualified Annuity (as previously stated, the Annuity firm is distributing this out to all 4 of us beneficiaries after we file forms and W-9), $2K in a qualified Annuity and $9500 in a checking account.....all in the Trust.   PS....I forgot to mention that I inherited an IRA CD from my Mother in another credit union that is NOT in the Trust.  They moved it over to my account as I was the sole beneficiary.  It matures on December 30, 2023 (next month).  I wa hoping to keep the IRA and put it into another IRA CD with the same credit union.  Does this need to be included  on the 1041 (still not real sure of this form) and if I do keep it what would be the RMD on my part on an annual basis.....and.....do I take any RMD this year or do I start in 2024.I know this is a lot to take in.  Thanks in advance. 

Submitted by Alan - IRA critic on Sat, 2023-11-18 20:50

The trust must file a 1041 only if the gross income for the year is over $600. If the trust inherited only small amounts, it perhaps can be terminated perhaps before it receives $600.  It’s not clear what the purpose of these trusts are, and whether income is to be passed through to the beneficiaries or retained in the trust. Trust tax rates are high, and therefore many trusts collect the income and pass it through to the beneficiaries and the trust takes a deduction for the amount distributed to beneficiaries, issues a K 1 to the beneficiary and the beneficiary then pays the tax at their personal rates. Most Form 1041 returns are completed by professionals (not necessarily CPAs) as they are confusing and quite different than your 1040 is. Accounts passing outside the trust do not affect the 1041. There are no beneficiary RMDs due in 2023, they start in 2024.

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