Author Topic: Required Distributions from Inherited IRA  (Read 1126 times)

moneetalks

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Required Distributions from Inherited IRA
« on: March 11, 2017, 05:47:54 PM »
As some of you may know, when you inherit a traditional IRA from someone who was over 70 1/2 when they died, you are required to take yearly distributions based on your own life expectancy.  This is the case for me. 

Trouble is....this whole concept slipped my mind and I have failed to do so for THREE years. 

Anyone out there know how to fix this?

moneetalks

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Re: Required Distributions from Inherited IRA
« Reply #1 on: March 11, 2017, 06:17:22 PM »
I think I found it:

Option #1 - Cash Out the IRA in 5 Years. You, as the non-spouse IRA beneficiary, will be allowed to withdraw all of the funds from the IRA by December 31 of the fifth year following the IRA account owner's death. If you choose this option, then each withdrawal will be included in your taxable income during the year the funds are withdrawn.


You do not have to take the distributions in installments but must withdraw all of the funds at any time prior to the applicable December 31 date.

From vanguard website

Frankies Girl

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Re: Required Distributions from Inherited IRA
« Reply #2 on: March 11, 2017, 07:49:55 PM »
Bad luck, sorry, man.

And whomever the company you had the inherited IRA with is also dumb as a box of rocks for not contacting you to set up required minimum distributions automatically. Unfortunately, you can't go back and fix it to do the RMDs now - you have to do the 5 year liquidation, so you've got 2 years (?) roughly to get the money out now and pay taxes on it. Wow, I do hope it isn't more than a few thousand... I have one that was in the 300K range, and I can't imagine how much of a mess that would have been if I'd forgotten about it.

Seriously, whomever the company was with, I'd question ever giving them any business with them again since it should have been standard for a rep to contact you and ask what you wanted to do with it once they were informed you'd inherited it.

You'll now be forced to take all of the money out, and it will count towards your income and your taxes may be insane if the amount pushes you into higher taxable brackets, and for sure you'll lose way more than if you'd done the RMDs properly. :(
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secondcor521

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Re: Required Distributions from Inherited IRA
« Reply #3 on: March 11, 2017, 07:55:14 PM »
Taking it all out within ~5 years (now ~2 years, since you've already waited ~3) will give you quite a tax bill if the IRA is large, because the withdrawals will be considered ordinary income to you in the year of the withdrawal.

Another option, which would make sense the younger you are and the larger the IRA balance, is to just go ahead and pay the penalty.  The penalty is 50% of the RMDs you should have taken but did not.

You could also ask for a waiver of the 50% penalty.  See here:

http://www.investopedia.com/articles/retirement/05/011005.asp
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moneetalks

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Re: Required Distributions from Inherited IRA
« Reply #4 on: March 12, 2017, 10:14:21 AM »
Frankie's girl,

I agree and have done my best to shift blame (in my mind) to Scottrade ;)
It would have been nice to set it up where it would just happen automatically, but they tell me it's not an option.  I've always been pleased with Scottrade and am NOT trashing them for this.  I still hold a good deal of $ with them and have no plans to change.

Also, it's not a TON of money but its also not an insignificant amount either and the taxes will hurt. 

I just need to do the math and see which is the least punishing option. 

Great day to you all!  And thanks for the thoughtful responses.


FinancialDad.org

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Re: Required Distributions from Inherited IRA
« Reply #5 on: March 12, 2017, 01:36:11 PM »
Not trying to plug any company over another here, but more data that may be helpful..

I believe that Vanguard has a system for Inherited IRAs (and non-inherited IRAs?) where they will automatically notify you of RMDs and/or automatically distribute RMDs (your choice).

Good luck sorting out and crunching the numbers..hope the bottom line isn't too painful.

moneetalks

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Re: Required Distributions from Inherited IRA
« Reply #6 on: March 12, 2017, 02:53:49 PM »
Thanks again everyone.

Secondcor521 - you hit the nail right on the head.  It actually turns out much less painful to pay the excise tax. 

I had to go back and determine the value of the account on dec 31 of each of the past three years.  Then calculate what my RMD (required minimum disbursement /distribution) would have been.

I then take each of those amounts out...counting that amount as income for this year (thus pay ordinary income taxes on it)....THEN pay the IRS half of the money I withdrew as punishment - er, Im mean EXCISE tax. 

That is overall less daunting than cashing it all in and paying 28% of it in income tax.  Luckily, the value has increased nicely these three years, so in the grand scheme, I have nothing to complain about. 

secondcor521

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Re: Required Distributions from Inherited IRA
« Reply #7 on: March 12, 2017, 04:28:28 PM »
Glad you figured it out and that it turned out to be a better option.

I'd encourage you to consider asking the IRS to waive the penalty as well.  Nothing ventured, nothing gained and all that rot.
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Re: Required Distributions from Inherited IRA
« Reply #8 on: March 13, 2017, 11:55:50 AM »
Dump Scottrade for the inherited IRA once you've squared away your penalties.  Fidelity and Vanguard will both calculate your RMD and automatically send you a check each year at the time of your choosing.  (I have them send me a check in my father's b-day month).  You don't want to have to remember to do this every year.


FinancialDad.org

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Re: Required Distributions from Inherited IRA
« Reply #9 on: March 13, 2017, 12:17:59 PM »
This may be a bit off topic, and I don't want to assume (or presume), but I ran into something with Inherited IRAs regarding the factors to be used for the RMDs.  I had misunderstood how they apply in year 2 and beyond.

My understanding: If two or more people inherit an IRA then the "factor" that is used to determine the RMD for the first year comes from the IRS' "single life divisor" table from pub 590 based on the age of the oldest inheritor.

This calculation is straightforward: Balance at year 1 end / the "factor" = RMD for year 1.

Then in year 2, I had assumed that you'd take the next factor off the table on pub 590 (since everyone is a year older).  However, I believe this is incorrect.

My understanding is that the IRS rules on inherited IRAs say that you take the first-year factor based on the age of oldest person who inherited the IRA (just as outlined above), but in subsequent years, you don't use the pub 590 table at all.  For years 2 and beyond you decrease the prior year's factor by 1.  (If year 1 had a factor of 35.1 for an oldest inheritor who was, at the time, 49 years old; then year 2's factor is 34.1, year 3 will use 33.1, etc.)

Passing this along for correction/augmentation by the community.  This was a nuance I wasn't aware of and one that could have caused problems.  (And one that Scottrade may or may not help you with.)

secondcor521

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Re: Required Distributions from Inherited IRA
« Reply #10 on: March 13, 2017, 05:19:55 PM »
This may be a bit off topic, and I don't want to assume (or presume), but I ran into something with Inherited IRAs regarding the factors to be used for the RMDs.  I had misunderstood how they apply in year 2 and beyond.

My understanding: If two or more people inherit an IRA then the "factor" that is used to determine the RMD for the first year comes from the IRS' "single life divisor" table from pub 590 based on the age of the oldest inheritor.

This calculation is straightforward: Balance at year 1 end / the "factor" = RMD for year 1.

Then in year 2, I had assumed that you'd take the next factor off the table on pub 590 (since everyone is a year older).  However, I believe this is incorrect.

My understanding is that the IRS rules on inherited IRAs say that you take the first-year factor based on the age of oldest person who inherited the IRA (just as outlined above), but in subsequent years, you don't use the pub 590 table at all.  For years 2 and beyond you decrease the prior year's factor by 1.  (If year 1 had a factor of 35.1 for an oldest inheritor who was, at the time, 49 years old; then year 2's factor is 34.1, year 3 will use 33.1, etc.)

Passing this along for correction/augmentation by the community.  This was a nuance I wasn't aware of and one that could have caused problems.  (And one that Scottrade may or may not help you with.)

The above is essentially correct but possibly slightly inaccurate in one way and incomplete in another.

First, the RMD in year 1 is based on the divisor from the table divided by the balance at the end of the *previous* year, not the current year.  So it might be better phrased as Year 1 RMD = Year 0 12/31 balance / divisor from table.

Second, if there are multiple beneficiaries of an IRA, and it is split among the multiple beneficiaries in a timely manner (don't quote me, but I think it's by the end of the year following the year of death of the original IRA owner), then each beneficiary's inherited IRA is treated individually and each beneficiaries' RMD is based on their individual age, regardless of the age of any other beneficiary.  So for example, a younger sibling or a grandchild could use a larger divisor and calculate a smaller RMD than an older sibling or other beneficiary.

But yes, in year 2 and beyond, you subtract one from the previous year's divisor; you do not go back to the tables.
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Spork

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Re: Required Distributions from Inherited IRA
« Reply #11 on: March 13, 2017, 05:46:29 PM »
If I recall (been a while since I dug into this)... there is also a dependency on whether the IRA owner took their RMD the year they died.

I.e., if they take their RMD and there are multiple non-spouse inheritors, the oddball split rules don't apply.  (But check me on this!)

edit to correct myself:
Quote
Multiple individual beneficiaries.   If as of September 30 of the year following the year in which the owner dies there is more than one beneficiary, the beneficiary with the shortest life expectancy will be the designated beneficiary if both of the following apply.

    All of the beneficiaries are individuals, and

    The account or benefit has not been divided into separate accounts or shares for each beneficiary.

SO... if I am interpreting this correctly, if you split the IRA up into separate accounts, you don't use the oldest beneficiary's age.  Each beneficiary uses their own age.

I am not sure where I got the "took the RMD on the year they died" part.  I do remember there being something tied to that... because I remember discussing this with my dad's accountant before his death and he advised dad to take his RMD early.  (His death was not exactly a surprise.)
« Last Edit: March 13, 2017, 05:57:12 PM by Spork »
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secondcor521

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Re: Required Distributions from Inherited IRA
« Reply #12 on: March 13, 2017, 06:58:22 PM »
All I know is that if the RMD has not been taken in the year of death, then it is required to be taken out.  If that final RMD is not taken, then there is the 50% excise penalty mentioned up thread.

I am no expert, but not taking the RMD in the year of death would incur the penalty, which I think would be assessed against the estate, so it would be an estate liability that would need to be satisfied before the beneficiaries could (properly) be paid out.  So it could be an impediment to splitting the IRA and using the age of each beneficiary instead of the oldest beneficiary.

Thanks for the 9/30 date in your quote, also.  I was mistaken about it being end of year then.

I also noticed another wrinkle:  if a portion of the IRA is left to a charity, then the other individual beneficiaries would not be able to stretch the IRA using RMD's...I guess they'd be left with the 5 year rule.
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Spork

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Re: Required Distributions from Inherited IRA
« Reply #13 on: March 13, 2017, 09:27:41 PM »
I also noticed another wrinkle:  if a portion of the IRA is left to a charity, then the other individual beneficiaries would not be able to stretch the IRA using RMD's...I guess they'd be left with the 5 year rule.

Woah.  I need to talk to someone about that.  I believe part of my Dads went to charity.  I just read that paragraph and I can almost read it two ways.  I need to get some input.  I'd hate to have to use the 5 year rule.
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Frankies Girl

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Re: Required Distributions from Inherited IRA
« Reply #14 on: March 13, 2017, 10:14:57 PM »
I also noticed another wrinkle:  if a portion of the IRA is left to a charity, then the other individual beneficiaries would not be able to stretch the IRA using RMD's...I guess they'd be left with the 5 year rule.

Woah.  I need to talk to someone about that.  I believe part of my Dads went to charity.  I just read that paragraph and I can almost read it two ways.  I need to get some input.  I'd hate to have to use the 5 year rule.

This looks like it is based off a misunderstanding. According to Investopedia, establishing separate beneficiary accounts (the BDA or inherited IRA with the deceased's name etc), you do not have to worry and individual heirs can still do the stretch IRA option.

http://www.investopedia.com/articles/retirement/05/giftingtocharity.asp
Quote
Caution: If a charity is one of multiple beneficiaries for your retirement account, it may have a negative impact on the stretch options that are available to your other beneficiaries. For instance, if you should die before your required beginning date, your other beneficiaries will be required to distribute the assets by Dec 31 of the fifth year following the year of your death. This can be resolved by one of the following means:

•Establishing separate retirement accounts for each beneficiary. Thus, the charity's lack of life expectancy will not affect your other beneficiaries.

•The charity cashing out its portion of the inherited assets by Sept 30 of the year following the year you die. Under this rule, beneficiaries that receive a full distribution of their portion by Sept 30 are disregarded for the purposes of determining the life expectancies that affect distribution options.

But obviously, do your own research. ;)
« Last Edit: March 13, 2017, 10:17:31 PM by Frankies Girl »
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Spork

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Re: Required Distributions from Inherited IRA
« Reply #15 on: March 14, 2017, 07:01:26 AM »
I also noticed another wrinkle:  if a portion of the IRA is left to a charity, then the other individual beneficiaries would not be able to stretch the IRA using RMD's...I guess they'd be left with the 5 year rule.

Woah.  I need to talk to someone about that.  I believe part of my Dads went to charity.  I just read that paragraph and I can almost read it two ways.  I need to get some input.  I'd hate to have to use the 5 year rule.

This looks like it is based off a misunderstanding. According to Investopedia, establishing separate beneficiary accounts (the BDA or inherited IRA with the deceased's name etc), you do not have to worry and individual heirs can still do the stretch IRA option.

http://www.investopedia.com/articles/retirement/05/giftingtocharity.asp
Quote
Caution: If a charity is one of multiple beneficiaries for your retirement account, it may have a negative impact on the stretch options that are available to your other beneficiaries. For instance, if you should die before your required beginning date, your other beneficiaries will be required to distribute the assets by Dec 31 of the fifth year following the year of your death. This can be resolved by one of the following means:

•Establishing separate retirement accounts for each beneficiary. Thus, the charity's lack of life expectancy will not affect your other beneficiaries.

•The charity cashing out its portion of the inherited assets by Sept 30 of the year following the year you die. Under this rule, beneficiaries that receive a full distribution of their portion by Sept 30 are disregarded for the purposes of determining the life expectancies that affect distribution options.

But obviously, do your own research. ;)

Okay... I saw this as one interpretation of what I read on the IRS site... that the splitting into accounts fixed things.  But I could also easily interpret it the way secondcor521 interpreted it.

I need to get RMDs set up this year anyway.  This will just be the spark that forces me to call and get them started.  I suspect Vanguard has a questionnaire script and has done this before.
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Spork

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Re: Required Distributions from Inherited IRA
« Reply #16 on: March 15, 2017, 08:07:38 AM »
Follow up on the charities question...

I had an appointment with Vanguard this morning to discuss.  They sent me a questionnaire ahead of time:

1. Did you inherit this account from the original owner? - Yes or No
2. Original owner's date of birth.
3. Original owner's date of death.
4. Was there more than one primary beneficiary on the original account? Yes
or No.
-If yes, where all of the other beneficiaries individuals (i.e. not a trust
or charity)?
-If yes, did all of the other beneficiaries separate their portion of the
account prior to the IRS deadline (which is the year following the original
IRA owners passing)?

Great... That seems like all the right questions.

I log into my account 5 minutes before the phone call and YIPES!  They have the IRS life expectancy factor set to 5.7 years.  My RMD was huge!

They call... we go over the answers to the questions ... and then I ask: "So... I'm no expert.  I have trouble understanding the IRS language.  But I calculated my life expectancy to be much lower (using my age)... can you explain?"

Lots of hold time... lots of "be right back with you"... and then they put the specialist on the line.  He very politely apologizes and says I have it right... they have it wrong.

So, at least according to Vanguard's interpretation, splitting the accounts up and distributing the charity up front means that they use the beneficiary life expectancy from Table I.

All is well.

(edit: Typo.  I typed "table II instead of table I")
« Last Edit: March 15, 2017, 08:44:45 AM by Spork »
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FinancialDad.org

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Re: Required Distributions from Inherited IRA
« Reply #17 on: March 15, 2017, 02:57:29 PM »
@secondcor521

<<The above is essentially correct but possibly slightly inaccurate in one way and incomplete in another.>>

Thank you for the very courteous way of pointing out my error(s).  Always good to err on the side of courtesy in electronic communications, but I will be a bit more direct:

Thank you for fixing my mistake. :)

And thank you for augmenting what I put out there.  Hopefully this will help others.


@Spork

<<SO... if I am interpreting this correctly, if you split the IRA up into separate accounts, you don't use the oldest beneficiary's age.  Each beneficiary uses their own age.>>

Notwithstanding the comment I'm about to make below, this is *not* my understanding.  The counsel I have gotten is that if there are multiple (human) beneficiaries, if the IRA was already subject to RMDs before being passed on then the first year's factor for all beneficiaries is based on the age of the oldest beneficiary.

And lastly, as @Frankies Girl says:

<<But obviously, do your own research. ;)>>

Please don't take any of my statements as the truth, but as, perhaps, a place to start asking questions.

Peace..

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Re: Required Distributions from Inherited IRA
« Reply #18 on: March 15, 2017, 03:30:59 PM »

@Spork

<<SO... if I am interpreting this correctly, if you split the IRA up into separate accounts, you don't use the oldest beneficiary's age.  Each beneficiary uses their own age.>>

Notwithstanding the comment I'm about to make below, this is *not* my understanding.  The counsel I have gotten is that if there are multiple (human) beneficiaries, if the IRA was already subject to RMDs before being passed on then the first year's factor for all beneficiaries is based on the age of the oldest beneficiary.


Did you read the quote above my interpretation?  This is straight from Publication 590-B (2016), "Distributions from Individual Retirement Arrangements (IRAs)". 

In my particular case, there are 5 beneficiaries with holdings held under multiple brokers.  Vanguard's interpretation was the same as mine... using my age from Table I.  I believe one of the other beneficiaries is discussing this with her brokerage tomorrow.  We will see if they agree.  I am in no way claiming to be an expert here.  I'm relying on my own non-lawyer, non-accountant reading of the IRS publication combined with Vanguard's interpretation.

I should probably have quoted the next paragraph... so quoting the whole thing to be verbose:

Quote
Multiple individual beneficiaries.   If as of September 30 of the year following the year in which the owner dies there is more than one beneficiary, the beneficiary with the shortest life expectancy will be the designated beneficiary if both of the following apply.

    All of the beneficiaries are individuals, and

    The account or benefit has not been divided into separate accounts or shares for each beneficiary.

Separate accounts.   A single IRA can be split into separate accounts or shares for each beneficiary. These separate accounts or shares can be established at any time, either before or after the owner's required beginning date. Generally, these separate accounts or shares are combined for purposes of determining the minimum required distribution. However, these separate accounts or shares will not be combined for required minimum distribution purposes after the death of the IRA owner if the separate accounts or shares are established by the end of the year following the year of the IRA owner's death.

The separate account rules cannot be used by beneficiaries of a trust.
 
Source: https://www.irs.gov/publications/p590b/ch01.html

Edit to add:
After everyone reads the hard-to-read IRS gobbleygook, here is a nice English version written by a CPA that deals with multiple inheritor IRAs.
http://www.obliviousinvestor.com/inherited-ira-rules/
« Last Edit: March 15, 2017, 04:00:35 PM by Spork »
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secondcor521

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Re: Required Distributions from Inherited IRA
« Reply #19 on: March 15, 2017, 04:13:17 PM »
@secondcor521

<<The above is essentially correct but possibly slightly inaccurate in one way and incomplete in another.>>

Thank you for the very courteous way of pointing out my error(s).  Always good to err on the side of courtesy in electronic communications, but I will be a bit more direct:

Thank you for fixing my mistake. :)

And thank you for augmenting what I put out there.  Hopefully this will help others.


@Spork

<<SO... if I am interpreting this correctly, if you split the IRA up into separate accounts, you don't use the oldest beneficiary's age.  Each beneficiary uses their own age.>>

Notwithstanding the comment I'm about to make below, this is *not* my understanding.  The counsel I have gotten is that if there are multiple (human) beneficiaries, if the IRA was already subject to RMDs before being passed on then the first year's factor for all beneficiaries is based on the age of the oldest beneficiary.

And lastly, as @Frankies Girl says:

<<But obviously, do your own research. ;)>>

Please don't take any of my statements as the truth, but as, perhaps, a place to start asking questions.

Peace..

Appreciate the kind remarks...right back at you.

I think your last full paragraph above is inaccurate.  As long as there are multiple individual beneficiaries and the IRA is split in a timely manner, each beneficiary should be able to use their own age to determine their divisor.

I think this is pretty plainly stated in the following articles:

http://www.kiplinger.com/article/retirement/T032-C000-S004-ira-heirs-beware-mistakes.html
https://personal.vanguard.com/us/insights/article/inherited-ira-072014
http://www.obliviousinvestor.com/inherited-ira-rules/
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Re: Required Distributions from Inherited IRA
« Reply #20 on: March 15, 2017, 05:29:56 PM »
@secondcor521 & @Spork:  Thanks again.  I think I received bad advice (or misunderstood good advice) on inherited and timely-split IRA accounts. 

I should have come here (to these forums) first. :)

Appreciate the feedback.