Inheriting an IRA and Roth

[Alternatepriorities]

My father passed away last year and left a traditional and a Roth IRA behind with my siblings and I listed as the beneficiaries. I just learned this week from the estate attorney that since the beneficiaries are named we don't need to wait for the probate process to move forward with these accounts. He left the Roth entirely to me, but I know the intention was for me to split it with my siblings. The traditional is designated to be split equally. It's a modest but meaningful sum of money.

My understanding so far is that the Roth will pass without taxes to me and I can gift my siblings their share.

The traditional will be divided and then we will each pay taxes on our own as ordinary income based on our respective tax brackets. I'm a little confused as to the rules for spreading it out over several years though.

Am I understanding it right? Can those who know the system better clarify what I'm not following on? Would the taxes for the traditional be for the year of distribution or the year of his passing?

Thank You!

[Sandi_k]

You have a 10 year period from date of death to withdraw from the IRAs.

Note that the taxation occurs in the year you withdraw the funds. The brokerage where the IRAs are located will require you to each set up an account. For the tIRA, they will then transfer 1/3 of the decedent's account into each kid's account.

For the Roth, they will require you to open an "inherited Roth" account; note that if you are sharing the funds with siblings, you have the ability to share $17k per year per person, without having to file specific forms with your taxes to report the gift to the IRS. If the shared amount is more than $17k per year, you have to file Form 709 with your taxes for each year you make a "gift" of the inherited assets.

Unfortunately, the government sees the transfer of funds from the IRA assets to be a gift from you to the siblings, since the beneficiaries were not set up properly by your deceased relative.

https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes

[secondcor521]

Assuming you are not eligible designated beneficiaries - and you probably aren't - you have until 12/31 of the year containing the date 10 years after the date of your father's passing.  Since he passed in 2022, you have until 12/31/2032 to drain both the inherited traditional IRAs and the inherited Roth IRA.

The IRS has pending regulations to require RMDs during this period, but those regulations are still under review and have had negative feedback.

Any distribution from the Roth is almost certainly - check with your CPA - tax free.  The distributions from the traditional IRA are taxed as ordinary income to the beneficiary in the tax year that the distribution is made.

It is not common, but if your father had contribution basis in his traditional IRA from after-tax contributions, that is inherited by the beneficiaries in proportion to their beneficial interest.  So if each of the beneficiaries is due an equal 1/3 share, each beneficiary would receive 1/3 of your father's contribution basis.  The executor of your father's estate or someone with access to your father's tax records could check for a Form 8606 to find the contribution basis.  If you find a contribution basis, the beneficiaries can use it to fill out a Form 8606 with your taxes and it will reduce the taxes due on the traditional IRA distributions because a pro rata share of the contribution basis is returned tax-free with each distribution.

On the Roth IRA, it can grow tax free until 12/31/2032.  Depending on how it is invested and your financial situations, it may be worthwhile waiting until that date to distribute the assets.

Also, before you transfer the Roth IRA into your name, you might investigate disclaiming 2/3 of it.  Depending on the state intestacy laws and perhaps the Roth IRA custodial agreement, this may result in that 2/3 going to your siblings.  The benefit here would be that you would not have to deal with gifting limits nor the trade-off of waiting or not waiting the 10 years for your siblings to receive their share.  Disclaimers have a number of requirements - you should understand them and disclaimers in general before deciding to do one, and you may want to enlist an attorney to help.

[Sandi_k]

@secondcor521 - good call on disclaiming the portion of the IRA that is intended for siblings, if possible. Much cleaner than taking it 100% and being burdened with trying to dole it out fairly.

[Alternatepriorities]

Thanks for the replies!

There are actually four of us, but that doesn't really change anything. Three of us are very much in a possition where waiting could make sense and one could put the money to good use this year and might not even hit the 22% bracket.

The Roth is small enough I should be able to distribute it without any paperwork.

I am the executor, and I had no idea the 8606 form was a thing. Thank you. It's not going to apply here as it was all pretax contributions. You are correct that we are not eligible designated beneficiaries. Am I understanding correctly that WF (the custodian) would create an inherited tIRA for each of us and then we would each have the option of draining it at our own tax convenience sometime before 12/31/2032? For example, the sister who needs the money could drain hers this year, but I could wait until the year DW takes a sabbatical and then drain mine over a year or two. I had in my mind that I had to declare a plan ahead of time a stick to it, but I could be confusing memories or maybe the rules changed? Also are the inherited IRAs like any other in terms of being able to control where the money is invested or change my custodian to Vanguard after it's set up?

[Villanelle]

You might also consider not taking your portion of the tIRA, so it is divided in half by the other 2, which would mean you "owe" them less from the Roth in order to make things even. 

You say that it is small, in which case... does your portion of the tIRA offset it or come close (more or less)?  IOW, if the tIRA is $100k ($33k each) and the Roth is $45k ($15k each when split), then everyone should walk away with about $48k.  You don't take your $33k portion of the tIRA, then your siblings would each have $50k (the $100k, split in 2 instead of 3), and you'd have $45k, which means they each owe you only $1000.  If the siblings are in agreement, something like this might be easier than claiming some but not all of the Roth that is only in your name.  You'd be declining your entire portion of the tIRA instead, and then either your siblings pay you or you pay them the slight difference.

[secondcor521]

I am the executor, and I had no idea the 8606 form was a thing. Thank you. It's not going to apply here as it was all pretax contributions. You are correct that we are not eligible designated beneficiaries. Am I understanding correctly that WF (the custodian) would create an inherited tIRA for each of us and then we would each have the option of draining it at our own tax convenience sometime before 12/31/2032? For example, the sister who needs the money could drain hers this year, but I could wait until the year DW takes a sabbatical and then drain mine over a year or two. I had in my mind that I had to declare a plan ahead of time a stick to it, but I could be confusing memories or maybe the rules changed? Also are the inherited IRAs like any other in terms of being able to control where the money is invested or change my custodian to Vanguard after it's set up?

Yes, the custodian will typically require each beneficiary to set up an inherited IRA at that custodian to receive their portion.

Yes, each beneficiary can take distributions however they like independently of any other beneficiaries' distribution decisions.  Sister can take hers now, you can take yours later.

No, you're not required to declare any sort of plan.  You just must drain the entire account by 12/31/2032, and if the new IRS regulations come into effect, each beneficiary may also be subject to RMDs.  Other than those two restrictions, it's entirely up to you. (*)

Yes, you can roll the inherited IRA from WF to Vanguard or any other IRA custodian whenever you like.  You can also change how it is invested whenever you like.

(*) From a tax strategy point of view, it generally makes sense to spread distributions out over several years, and also to evaluate the rest of your tax situation - so taking somewhat more in the year when your DW is on sabbatical is probably smart.

[Alternatepriorities]

My father was 73 when he passed and had taken his RMD for 2022.

How does the RMD effect inherited IRAs? Is it as straight forward as plugging each of our vital statistics and balance into an actuary table to figure out how much we need to withdraw each year?

Thanks!

[Alternatepriorities]

So I posed the question to chat gpt... This is the first time I've tried it.

Does an inherited IRA have RMD

Yes, an inherited IRA (Individual Retirement Account) typically has Required Minimum Distributions (RMDs) that must be taken by the beneficiary. The RMD rules for inherited IRAs depend on several factors, including the age of the original account owner at the time of their death and the relationship between the account owner and the beneficiary.

If the original account owner passed away before reaching their required beginning date for RMDs (which is generally April 1 of the year after they turn 72 years old), then the beneficiary of the inherited IRA must begin taking RMDs by December 31 of the year following the account owner's death. The RMD amount is calculated based on the beneficiary's life expectancy and the balance of the inherited IRA.

If the original account owner had already begun taking RMDs before their death, then the beneficiary of the inherited IRA must continue taking RMDs according to the original owner's schedule, or they may be able to use their own life expectancy to calculate the RMD amount if they meet certain criteria.

It's important to note that failure to take the required minimum distributions from an inherited IRA can result in significant tax penalties, so it's crucial to understand the RMD rules and meet the distribution requirements.

Thank you!

You're welcome! If you have any other questions or if there's anything else I can assist you with, feel free to ask.

If the decedent was already taking RMD and the beneficiary was born on 11/21/1980* what would the RMD be?

To calculate the RMD for an inherited IRA when the decedent was already taking RMDs, the beneficiary can use the IRS Single Life Expectancy Table to determine their life expectancy factor.

In this case, the beneficiary was born on 11/21/1980, so they would be 42 years old at the end of 2022. According to the IRS Single Life Expectancy Table, the life expectancy factor for someone who is 42 years old is 41.5 years.

To calculate the RMD for the first year, the beneficiary would divide the balance of the inherited IRA as of December 31 of the previous year by their life expectancy factor of 41.5 years. For example, if the balance of the inherited IRA as of December 31, 2021, was $100,000, the RMD for the first year would be $100,000 ÷ 41.5 = $2,409.64.

It's important to note that the RMD amount will change each year based on the balance of the inherited IRA and the beneficiary's updated life expectancy factor.

*Not the actual date

[secondcor521]

ChatGPT got it mostly right, but is incorrect (or simply out of date) and missed an important note on a few things:

1.  The RBD for everyone not taking RMDs currently is now 73, and will go to 75 for those born in 1960 and later.

2.  For inherited IRAs, you look up the divisor the first year, but for every subsequent year you subtract 1.0 from the initial divisor.  You do not go back to the table for the second and subsequent years.

3.  The RMD tables were recently updated.  The new correct divisor for a 42 year old would be 43.8.  (See page 48 at https://www.irs.gov/pub/irs-pdf/p590b.pdf).

4.  With the SECURE Acts, the beneficiary is generally not subject to RMDs but instead can drain the account in any fashion they like as long as it is emptied in a 10- to 11-year time span.  Although the IRS is working on implementing regulations to enforce RMDs during this 10- to 11-year time span.

Also, if your father was alive in 2023 (not clear when he passed, 2022 or 2023), then he was required to take a 2023 RMD.  If he did not, then the beneficiaries (you and maybe your siblings or whomever) would be required to take his 2023 RMD from any combination of your inherited IRAs by the end of 2023.

Then there are also a number of special cases, which ChatGPT didn't even mention and I'm not going to bother with because (a) they're complicated, and (b) probably don't apply in this case.

[Alternatepriorities]

ChatGPT got it mostly right, but is incorrect (or simply out of date) and missed an important note on a few things:

1.  The RBD for everyone not taking RMDs currently is now 73, and will go to 75 for those born in 1960 and later.

2.  For inherited IRAs, you look up the divisor the first year, but for every subsequent year you subtract 1.0 from the initial divisor.  You do not go back to the table for the second and subsequent years.

3.  The RMD tables were recently updated.  The new correct divisor for a 42 year old would be 43.8.  (See page 48 at https://www.irs.gov/pub/irs-pdf/p590b.pdf).

4.  With the SECURE Acts, the beneficiary is generally not subject to RMDs but instead can drain the account in any fashion they like as long as it is emptied in a 10- to 11-year time span.  Although the IRS is working on implementing regulations to enforce RMDs during this 10- to 11-year time span.

Also, if your father was alive in 2023 (not clear when he passed, 2022 or 2023), then he was required to take a 2023 RMD.  If he did not, then the beneficiaries (you and maybe your siblings or whomever) would be required to take his 2023 RMD from any combination of your inherited IRAs by the end of 2023.

Then there are also a number of special cases, which ChatGPT didn't even mention and I'm not going to bother with because (a) they're complicated, and (b) probably don't apply in this case.

Thank you,

Forum 1 : AI 0.5 :)

My father passed 12 days past 73 in 2022 and he had taken his RMD for the year when he passed. If I recall correctly the raise to 73 came after he'd already taken it? As far as I can tell since he took a RMD we need to keep taking them? The secure act seemed to make that a bit fuzzier, but as you said the IRS is working on regulations to bring them back again? Did I understand that right?

[secondcor521]

My father passed 12 days past 73 in 2022 and he had taken his RMD for the year when he passed. [1] If I recall correctly the raise to 73 came after he'd already taken it? [2] As far as I can tell since he took a RMD we need to keep taking them? [3] The secure act seemed to make that a bit fuzzier, but as you said the IRS is working on regulations to bring them back again? [4] Did I understand that right?

[Numbers added for reference]

1.  Correct, the raise to age 73 came too late for him.  He falls into the caveat "not [already] taking RMDs" in my point 1.  He was already taking RMDs because he turned 72 in 2021.

2.  Nope, those are old rules.  See #3 below.

3.  Under the SECURE Act, generally speaking, you are not subject to RMDs and you have until 12/31/2032 to empty your inherited IRA in any fashion and timing of your choosing.

The IRS is currently attempting to require RMDs of you, but the regulations are only proposed at this point and there is pushback on them.

To read the actual rules, I'd recommend you read through IRS Pub 590-B carefully with your situation in mind.  I'm speaking in generalities and making a few reasonable assumptions about your situation.  The rules for distributions from inherited IRAs can be complicated and you really should confirm things for yourself:  https://www.irs.gov/publications/p590b

4.  Mostly.  See above.

[SeattleCPA]

My father passed 12 days past 73 in 2022 and he had taken his RMD for the year when he passed. [1] If I recall correctly the raise to 73 came after he'd already taken it? [2] As far as I can tell since he took a RMD we need to keep taking them? [3] The secure act seemed to make that a bit fuzzier, but as you said the IRS is working on regulations to bring them back again? [4] Did I understand that right?

[Numbers added for reference]

1.  Correct, the raise to age 73 came too late for him.  He falls into the caveat "not [already] taking RMDs" in my point 1.  He was already taking RMDs because he turned 72 in 2021.

2.  Nope, those are old rules.  See #3 below.

3.  Under the SECURE Act, generally speaking, you are not subject to RMDs and you have until 12/31/2032 to empty your inherited IRA in any fashion and timing of your choosing.

The IRS is currently attempting to require RMDs of you, but the regulations are only proposed at this point and there is pushback on them.

To read the actual rules, I'd recommend you read through IRS Pub 590-B carefully with your situation in mind.  I'm speaking in generalities and making a few reasonable assumptions about your situation.  The rules for distributions from inherited IRAs can be complicated and you really should confirm things for yourself:  https://www.irs.gov/publications/p590b

4.  Mostly.  See above.

Great info and knowledge @secondcor521 .

[Alternatepriorities]

Thank you @secondcor521!

Particularly for the clarification on points 2 and 3. Researching it online has led to conflicting options and outdated information so it's really helpful to hear from someone who really knows and cares about the details.

[Alternatepriorities]

Update:

Despite WF doing their level best to mess things up almost all of the funds have made it to Vang now. Thank you all for the help.

A comparison of my customer experience if it helps anyone deciding where to set up an IRA in the future.

Vang - Call, I'm talking to a person within 2 minutes, they've just updated the interface and he hasn't done a transfer on the new system yet. Still we work through the process together and within 20 minutes its all set to go. Also I now know how to set up the second account transfer myself online in 10 minutes once the funds have settled.

WF - Call three times, get three different answers. Finally find someone who knows what needs to be done so I print, fill out, and scan physical papers before uploading them through a special portal. Properly filled out form gets rejected. Call 1-2 times per week for the next six weeks before someone finally convinces the processing team that it was their mistake and I only had one internal transfer selected. Wait another 7-10 business days. Account value has fallen more than 5% due to not being able to manage investments during this time. Finally get access to account. Manually liquidate each security. Turns out one security that was listed as "cash or equivalent" on my interface isn't so it fails to transfer. Call again, spend 10 minutes convincing the AI that I really need to talk to a person, spend 45 minutes getting it sorted and 5 minutes agreeing to them transferring (less than 200 dollars) so i can in theory close the account.

I helped my father set up his IRAs after he retired... I didn't know about Vanguard at the time and chose to use the bank he knew and it worked well enough for him until he passed. I really wish I had known about Vanguard and set his account up there.