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Clarifying RMDs For An Inherited IRA

By Julie Jason, originally posted on Forbes.com.

Questions from beneficiaries who inherited IRAs (individual retirement accounts) continue to come in, which is not a surprise.

Two laws changed the landscape for inheritors of tax-deferred accounts with the passage of the first SECURE Act (“SECURE 1.0”), which took effect in 2020, and SECURE 2.0 (signed into law in 2022). Plus, the IRS issued waivers of penalties for failure to take required minimum distributions (RMDs) during this time period as well, and regulations related to SECURE 1.0 are yet to be finalized. These are all good reasons to consult with your tax adviser about your personal tax situation before making any RMD decisions as a beneficiary of an inherited IRA.

Let’s talk through a reader’s situation.

Original Owner’s RMD Status

“Bethany’s” father passed away in 2020 at the age of 89, leaving her as his IRA beneficiary. He had been regularly taking RMDs since the age of 70 1/2. He took his final RMD in the year that he died. Had he not done so, his beneficiary, Bethany, would have had to take her father’s final year-of-death RMD. See taking an RMD in the year of the person’s death.

RMD waivers for 2020 did not affect Bethany because of timing. Those waivers came about when the CARES Act was signed by the president on March 27, 2020. The “early birds,” like Bethany’s father, who took their RMDs before the CARES Act became effective were left with questions that were answered by IRS Notice 2020-51, issued June 23, 2020. The notice clarified that anyone who took an RMD earlier in 2020 could redeposit it by Aug. 31, 2020, even if the redeposit was outside the normal 60-day (and one-per-year) rollover limitation.

Another penalty waiver came about in 2022, with IRS Notice 2022-53. Bethany may be able to benefit, depending on the advice she gets from her tax adviser. The following discussion is general in nature; her tax adviser will be able to decide on the proper course of action based on Bethany’s unique tax situation.

For our discussion, I turned to RMD software created by Brentmark (brentmark.com). (Conflicts disclosure: I subscribe to Brentmark software. Also, the Brentmark website posts links to some of my Forbes articles, for which I receive no compensation from Brentmark.)

Do RMDs Have to Be Taken for 2021 and 2022?

Bethany has not taken RMDs for 2021 and 2022, as she assumed she could wait until the 10th year after her father’s death to withdraw the full IRA.

Can she skip 2021 and 2022 RMDs? And, what about 2023?

Nicole Maholtz, the president and CEO of Brentmark, believes the answer is “no” to skipping 2021 and 2022. When the IRS waives penalties, it does not waive RMDs, explained Maholtz. “Many say that since there is no penalty that they are not needed, but the rule says that RMDs need to come out,” Maholtz said.

The other side of this argument is if there is no penalty, is there a violation?

The more conservative route would be to avoid the debate by taking the 2021 and 2022 RMDs.

As to the 2023 RMD, there is no waiver of penalty, so it’s clear that the 2023 RMD must be taken.

When Does the IRA Need to be Emptied?

Here are some additional questions to consider.

Question 1. How does SECURE 1.0’s 10-year rule work? Since Bethany’s father died in 2020, does that mean the account must be $0 by Dec. 31, 2031?

No. SECURE 1.0’ s 10-year rule takes you through the end of 2030.

As explained in IRS Publication 590-B, under the 10-year rule, “if the owner died in 2021, the beneficiary would have to fully distribute the IRA by December 31, 2031.”

Question 2. Does the 10-year rule apply to all beneficiaries?

No. A different rule applies to “eligible designated beneficiaries” — the topic of a future column.

Bethany is a designated beneficiary, not an “eligible” designated beneficiary, which is defined by Publication 590-B as “the owner’s surviving spouse, the owner’s minor child, a disabled individual, a chronically ill individual, or any other individual who is not more than 10 years younger than the IRA owner.”

What Is the 2023 RMD Based On?

Question 3. Is Bethany’s 2023 RMD based on the value in the account on 12/31/2022 and on the single life expectancy tables (found in Pub. 590-B)?

Yes. She will find her life expectancy age for the year after her father’s death, then reduce the number by 1 for each subsequent year. Note that the life expectancy numbers were adjusted when the new RMD tables took effect in 2022.

A Big 10th-Year RMD Payout

Question 4. If Bethany prefers, can she take her minimum RMD each year, and then by the 10th year take out the remaining balance as a lump sum in order to empty the account?

Yes. Bethany needs to take out RMDs in years 1-9, with the remainder removed by the end of year 10 (in this case, 2030), again because her father was already taking RMDs during his lifetime.

Of course, RMDs are minimum amounts. Bethany is not limited to RMDs. She can take out any amounts above the RMDs at any time. As with any withdrawals, those amounts will be subject to income tax.

How do RMDs work?

Let’s do an example, based on Brentmark calculations.

We’ll say Bethany was born in 1960; her father was born in 1931.

Bethany will have to deplete the inherited IRA by the end of 2030. Assume a rate of return of 6%.

If her father’s IRA was valued at a $100,000 in 2020, and Bethany took only minimum RMDs for the next nine years based on her life expectancy, she would have to withdraw more than $115,000 to empty the IRA in 2030.

Tax Planning

The 10th-year empty-out RMD requirement can be onerous for tax reasons. In a later post, let’s talk about tax-reducing strategies for high-net-worth IRA beneficiaries. Send me questions we can discuss anonymously at forbes@juliejason.com.


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