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"Insights into the Complicated Rules for Inheriting an IRA" by Julie Jason

Originally published: Oct. 7, 2022 (distributed by Andrews McMeel Syndication)

No matter your age, when you inherit a traditional tax-deferred IRA (individual retirement account), the tax laws force you to take withdrawals, whether you need the cash or not, and those withdrawals are generally taxable.

     I wish things were much easier, but for some reason, we just don't have a set of simple rules. The laws that apply to inherited IRAs have been in flux with the passage of the SECURE (Setting Every Community Up for Retirement Enhancement) Act in 2019. And, even now, change is coming due to IRS rule proposals. 

     In this sea of murkiness, you need to know what to do if you inherit an IRA. 

     I asked nationally known IRA expert Robert Keebler for guidance with a narrowly defined case study. Keebler, CPA/PFS, MST, AEP (Distinguished), is a partner with Keebler & Associates LLP (tinyurl.com/ykwbk68u) and an author of books and articles on retirement distribution planning and estate planning. 

     To limit the possible outcomes, I focused on one scenario: The IRA owner dies in 2022 with a single beneficiary, an adult son. Here are my questions: 

     -- If the IRA owner did not take his RMD for the year he died, does the beneficiary need to take a year-of-death distribution?

     -- Do annual required minimum distributions (RMDs) apply to the beneficiary who inherits the IRA?

     -- When does the entire balance of the account need to be withdrawn?

     -- Which IRS Publication 590-B table (tinyurl.com/yc6tx8dh) applies to calculate the beneficiary's RMDs?

     In this simple example, the answer will depend on the age of the IRA owner when he died. In other cases, you'd have to determine the type of beneficiary; there are different rules for spouses, young children, someone who is disabled or chronically ill, trusts and charities. 

First case: Assume the IRA owner dies at age 80 in 2022. 

     -- Year-of-death distribution required? Yes. 

     -- Annual RMDs required? Yes.

     -- Entire account to be withdrawn by: Dec. 31, 2032.

     -- Which Pub. 590-B table applies? Single Life Table. 

     At age 80, the owner would have been taking RMDs since the age of 70 1/2. Every tax-deferred IRA owner's RMD start date is tied to something called RBD, which stands for "required beginning date." If someone dies after his RBD, the beneficiary is also required to take RMDs -- and to make sure the owner's year-of-death RMD is withdrawn. (There are some changes coming that affect penalties when the beneficiary fails to take a timely year-of-death RMD -- a subject for a future column.) Before the SECURE Act, the RBD was tied to age 70 1/2. Now it's age 72.

     The beneficiary will need to take annual RMDs and clear out the IRA by the end of the 10th calendar year after the death of the IRA owner. 

     Second case: Assume the IRA owner dies at age 50 in 2022; his son, age 25, is his sole beneficiary. 

     -- Year-of-death distribution required? No. 

     -- Annual RMDs required? No. 

     -- Entire account withdrawn by: Dec. 31, 2032. 

     -- Which Pub. 590-B table applies? None, since the entire account must be withdrawn by the end of the 10th year after the death of the IRA owner. The beneficiary has the option to withdraw amounts anytime during those 10 years. 

     The reason for this result is the age of the owner when he died -- BEFORE his RBD. There is no requirement for the beneficiary to take an RMD in the year of death, since none was required of the owner. 

     What if the IRA is a Roth instead of a traditional tax-deferred IRA? Whether the Roth IRA owner is 50 or 80 (or any age) when he dies, the answer is the same. 

     -- Year-of-death distribution required? No.

     -- Annual RMDs required? No.

     -- Entire account withdrawn by Dec. 31, 2032? Yes.

     -- Which Pub. 590-B table applies? None.

     Why is this the case? There is no RMD for a Roth owner during his lifetime. 

     If you are an adviser to IRA owners, you'll want to hear Keebler present through Leimberg Webinar Services, with topics like "Wealth Transfer and Estate Planning Strategies for Clients with Large IRAs" (tinyurl.com/2e66x3cf). 

     One final note: Be sure to get advice from your CPA or tax adviser if you inherit an IRA. You don't want to fly solo -- and you don't want to rely on someone who is not fully immersed in the law on the subject. If a penalty is due, it will come out of your pocket, not the adviser's. 

To read Julie Jason's books, go to: https://juliejason.com/author/julies-books.