RMD and Inherited IRA
Came across an interesting case, but a bit of a quandary.
Seems a window who had a large IRA made up of hers and her former husband’s when he died 2 years ago. The balance was $1.22Million at the end of 2023. She died Nov 2024 at age 83 with an RMD of about $68,900 which she hadn’t taken in 2024. Here’s where it gets interesting….
There are 3 named beneficiaries, her 3 children all in their 50s and 60s. Their 10 year RMDs will begin this year after the inherited IRA is divided amongst them, but the question is what about their deceased mother’s RMD? My first thought is the RMD would be taken out by one of the beneficiaries, divided evenly with the 3 children beneficiaries and included as income on the deceased mother’s final tax return. But seems this would only work if the estate is named as beneficiary in the event of death for any RMD amount not yet taken in the year of death. So then the question is who takes the 2024 mother’s RMD? Can it be left in the IRA and be part of each beneficiaries 1/3 and then be taken out by each beneficiary? If so, what is the not-later-than-date for removing it to avoid the late withdrawal penalty?
Thanks
Permalink Submitted by Alan - IRA critic on Thu, 2025-03-06 16:40
Hello Bruce.
The deadline for completing the year of death RMD has been extended in the Secure Act Regs to the end of the following year, in this case 12/31/2025. This year of death RMD (only) can be completed in any combination of the 3 from their separate inherited IRA accounts. So if one of them wants to take a large distribution, the others will not have to participate. This will take coordination between them to assume that the RMD is completed. This RMD will be reported on a 1099R to the beneficiaries who take the distributions and on their respective tax returns. No 5329 need be filed as long as the year of death RMD is complete by 12/31/2025.
If the widow has assumed ownership of the inherited IRA from husband, the year of death RMD will be from the Uniform Table and based on the total year end balance on 12/31/2023. I don’t think there was a separate inherited IRA still maintained by the widow and I also assume husband passed after RBD, also that if there was more than one such IRA, the children’s %s were the same on both.
Also, because she passed after RBD, the children must also begin beneficiary RMDs of their own this year, resulting in taxable income of their own plus any portion of the year of death RMD each takes. There is no need to identify which amount is the year of death RMD and which amount is the beneficiary’s own 2025 RMD.
If any difference from what I assumed exists, please advise since it may affect the conclusions.
Permalink Submitted by BruceM on Thu, 2025-03-06 18:12
Thanks Alan
Interestingly, after I wrote the above question, the eldest son called and pointed me to something he’d found but didn’t understand and so asked me to look into it.
What I found was new IRS regulations on year-of-death RMDs, effective Sept 2024. If I’m reading it right, the deceased mother’s undistributed RMD can be part of the 1/3 of the inherited IRA transferred as inherited IRAs to each beneficiary and their RMD for 2025 plus 1/3 of the mother’s unwithdrawn RMD can be considered just one RMD for 2025. The eldest son doesn’t know the value of the IRA as of 12/31/24, but said she left it invested as her husband had when she transferred over his IRA into hers, which he said he though was full of technology stocks, as he had retired from that industry. But what I also find interesting is, as you say, the mother’s RMD may be taken by any of the kids. So from a tax optimization stand point, it would make the most sense to have the dependent with the lowest tax rate take the mothers entire RMD she didn’t take and then gift the 1/3 to each of the other two, reduced by the tax paid.
Here’s the link I got the information from (I know this forum doesn’t like copy/pasted links)
stwserv (dot) com / new-irs-regulations-on-year-of-death-rmds
Permalink Submitted by Alan - IRA critic on Thu, 2025-03-06 18:57
Yes, the beneficiaries will have to determine the year end value of the inherited IRA and their 2025 beneficiary RMD will be calculated on 1/3 of that amount using their attained age in 2025 to get the single life table divisor. The value of the inherited IRA on the date the separate accounts are created is immaterial.
Because the parent passed late in 2024, it was probably not possible to create the separate accounts by the end of 2024. That would have allowed the year of death RMD to be taken in 2024 and not have to be added to any beneficiary RMD in 2025. In cases where there is enough time, the beneficiary has a choice of which year is best for tax reasons to complete the year of death RMD.
I don’t think the math is correct with respect to the tax adjusted gifts. The lower bracket beneficiary is taking the distribution from his own share and accelerating his own tax bill. I think the other two should each gift the distributing beneficiary an amount by which their marginal rate exceeds that of the distributing beneficiary on 1/3 of the total year of death RMD.