Anyone here familiar with tax law regarding inherited IRAs?

[pondwater]

Anyone here familiar with tax law regarding inherited IRAs?

[Dave Gray]

Yes, I'm dealing with that now with my Dad's.  I'm not an expert, but I set up a separate IRA and have had to schedule releases of money to avoid getting taxed at 50%.

Did you have a specific question?

[pondwater]

Yes, I'm dealing with that now with my Dad's.  I'm not an expert, but I set up a separate IRA and have had to schedule releases of money to avoid getting taxed at 50%.

Did you have a specific question?

My father passed away in September of 2020. All of his accounts were Transfer on Death and split equally between me and my 2 brothers. Only one of the accounts was an IRA. When he died, his IRA account was converted into 3 separate IRA-BDA accounts in our names. It was my understanding that since we're not "Eligible Designated Beneficiaries" we subject to the new 10 year rule.

I've talked to Fidelity twice and they have told me that we're subject to the 10 year rule. My brother said they told him that we have to take out a required minimum distribution of 10% every year or face a penalty. Everything I've read online makes me think that we're subject to the 10 year rule. I sent him the links with the info I found and he replied with this:

Here's what I found at the Vanguard link...

Non-spouse and when spouse is not sole primary beneficiary. An individual non-spouse beneficiary must begin taking RMDs on the basis of his or her own life expectancy by December 31 of the year after the owner's death.

At the Fidelity link...

If you are listed as a nonspouse beneficiary along with one or more other beneficiaries, it's important to separate your portion of the decedent's IRA in your name and then complete your first RMD by December 31 of the year following the original IRA owner's death.

So now after reading that part I'm not so sure. They mention the 10 year rule, but then go on to say what's in the quote above. Anyhow, are the rules different if there are multiple beneficiaries? Do I need to make an RMD every year or do I have 10 years to take distributions as I wish?

[Dave Gray]

So, I'm in the same situation.  However, my parents put most of their assets into a trust, which made distribution and taxes easier.  If I'm not mistaken, though, there were a few things that were outside of the trust.

The deceased IRA, the way it worked was that it was split evenly between my siblings and we had to open or otherwise transfer the value into our own IRAs.  From there, you can't just keep the money in the IRA or you get taxed at 50%.  However, if you can, the best financial play is to keep as much of it in there as you can and then take required minimum distributions.  Some people liquidate the whole thing and take a tax penalty because they need the money or don't want to deal with it.

Here's what I did:

Even though I had an IRA, I set up a brand new IRA just for my Dad's stuff at the same bank that he had his.  It made transferring everything easier, because you're not working between banks.
Just this week, I had to set up two transactions.  1) I had them liquidate the minimum amount to get it done before 12/31.  2) I set up automatic deductions for every upcoming year of the minimum amount.

Then, the question is what to do with the money.  I don't know your financial situation, but you probably want it to be working for you -- so the bank is investing that money as its moved.  But you could just as likely move it to your bank and spend it.



Again, I'm not an expert, but in your situation, it seems exactly the same as mine and if I understand the quote from your brother, you would fall into that last sentence: You are listed as a non-spouse beneficiary along with others, therefore you have to separate your portion (which it sounds like you have done) and complete your RMDs yearly.

In short, I believe you can't split an IRA.  So, because it's not a sole-benficiary, you gotta break it up, and once broken up, you can't let it sit there forever.   So, get that first deduction done in the next few weeks so you don't lose out on the taxes.

[pondwater]

So, I'm in the same situation.  However, my parents put most of their assets into a trust, which made distribution and taxes easier.  If I'm not mistaken, though, there were a few things that were outside of the trust.

The deceased IRA, the way it worked was that it was split evenly between my siblings and we had to open or otherwise transfer the value into our own IRAs.  From there, you can't just keep the money in the IRA or you get taxed at 50%.  However, if you can, the best financial play is to keep as much of it in there as you can and then take required minimum distributions.  Some people liquidate the whole thing and take a tax penalty because they need the money or don't want to deal with it.

Here's what I did:

Even though I had an IRA, I set up a brand new IRA just for my Dad's stuff at the same bank that he had his.  It made transferring everything easier, because you're not working between banks.
Just this week, I had to set up two transactions.  1) I had them liquidate the minimum amount to get it done before 12/31.  2) I set up automatic deductions for every upcoming year of the minimum amount.

Then, the question is what to do with the money.  I don't know your financial situation, but you probably want it to be working for you -- so the bank is investing that money as its moved.  But you could just as likely move it to your bank and spend it.



Again, I'm not an expert, but in your situation, it seems exactly the same as mine and if I understand the quote from your brother, you would fall into that last sentence: You are listed as a non-spouse beneficiary along with others, therefore you have to separate your portion (which it sounds like you have done) and complete your RMDs yearly.

In short, I believe you can't split an IRA.  So, because it's not a sole-benficiary, you gotta break it up, and once broken up, you can't let it sit there forever.   So, get that first deduction done in the next few weeks so you don't lose out on the taxes.

Now here's screenshot that my other brother sent from here https://www.fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd. It lines up with what Fidelity told me when setting up the IRA and when I talked to them a couple months ago. The SECURES act in 2019 added the 10 year rule.





So I guess my question is what determines if me and my brothers are required to take RMDs or the 10 year rule applies? Not sure why they make this so complicated.

[Dave Gray]

From everything you're showing, I don't see why it wouldn't be the 10 year rule.  It seems pretty straight-forward.  You don't seem to fall into any of the exceptions.

[pondwater]

From everything you're showing, I don't see why it wouldn't be the 10 year rule.  It seems pretty straight-forward.  You don't seem to fall into any of the exceptions.

Wouldn't you fit into the same situation with the 10 year rule also? Did a lawyer or accountant tell you to take RMDs? Anyhow, since I'm going to have to pay taxes on it eventually, I think that I'll just take out enough every year to keep me in the same tax bracket. If my math is correct I should have it all cashed out in 6-7 years

[Dave Gray]

Wouldn't you fit into the same situation with the 10 year rule also? Did a lawyer or accountant tell you to take RMDs? Anyhow, since I'm going to have to pay taxes on it eventually, I think that I'll just take out enough every year to keep me in the same tax bracket. If my math is correct I should have it all cashed out in 6-7 years

Yes, I'm required to take RMDs also.  I have set that up to be automatic.  I think we're in the same situation.  I'm not sure if my RMDs are just a percentage of what's in there or if it's specifically over 10 years or what.