Inherited IRA Question

A financial advisor could provide specific requirements and recommendations, but be aware that there was also a SECURE 2.0 passed in December, 2022. It was quite vague in their required annual RMD’s for inherited IRA’s, but that was clarified in July, 2023. I suggest you research that, just to help inform your future decisions.

If I am correct, RMD’s were waived for 2021, 2022 and 2023. RMD’s are now required in 2024 and beyond. I do know that RMD’s are painfully taxed at the ordinary income rate. That said, withdrawal decisions usually go way beyond taxes.

As I previously noted, a tax expert should have the accurate details on RMD’s.

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Once that’s done, you should consider how much room you have in your tax bracket each year if you plan to spend it down quicker than the RMDs. Again, consult CPA. All at once is rarely a good idea, even with interest rates on debt.

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I took that into consideration. I could take half and keep us in the same tax bracket and then take the other half another time or just disbursements from there on out.

The student loans are still $30k and I like the idea of debt free minus the house.

I guess I should find a CPA. Was hoping it was a simple answer.

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Your mom passing in 2019 and your grandmother being 76 means you should have been taking RMDs every year since 2019.

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While I'm not an expert, here is my understanding.

I agree the OP should owe penalty for grandma's IRA as RMDs should have started in 2017. Though I have read in other forums the IRS will work with you if you contact them about missed RMDs.

However, for the mother's IRA I think OP may be ok. Since mom passed away before 2020 and was only 59, the OP should qualify for the 5 year rule. Also year 2020 doesn't count toward the 5 year rule.

So I believe the OP has till end of 2025 to fully deplete the mother's IRA w/o penalty. OP can decide each year how much to take out as long as the account is empty before 2026.

If OP doesn't want to deplete by 2026, then take RMDs like grandmother's IRA but may owe penalty for missed years.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-beneficiary

Take a look at section 'Non-spouse beneficiary options' under 'Death of the account holder occurred before 2020'. Also look at the definition for the 5 year rule near the bottom.

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It's all the same Inherited IRA. It was my grandmother's, then my mom's, now mine.

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Ah ok I didn't catch that. In that case, then my statement about depleting before 2026 w/o penalty should apply. Under the 5 year rule, you did not have to start RMDs in 2020. So there should be no penalties owed currently.

Since you are thinking of taking out all the money now. I would do half in 2024 and the rest in 2025. That assumes taking the full 90k in a single year would push you into another tax bracket.

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Depending when in the year you take the disbursement you may need to file estimated quarterly taxes during the year rather than waiting to pay the taxes on the disbursal when you file your tax return.

Otherwise you may be on the hook for penalty and interest on the "late" payment.

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Important planning piece. Don’t fret too much though, there are exceptions to the penalty. So long as you pay 100% of last year’s tax bill or 90% of the current one (or the total amount owed is under $1,000 but that’s going to be way under the taxes due on $30k-90k unless you take advantage of “filling your brackets” and are going to take less than the cost of your loans or the lump sum (the latter of which I would probably not do outside of weird cases)) you should be fine to let the money sit in a checking/savings account until tax day, if that is beneficial to you somehow.

I had two separate income “step” ups that had me very nervous about this concept until I realize that the way the law/rule is written, so long as you make a salary (typical w2) that is at least the year prior’s amount, and you haven’t adjusted your withholding, you will pay 100% of the previous year’s tax, so it almost works out to “first time is free” when it comes to not knowing that you should pay estimates in cases like this.





But it’s worth a couple hundred bucks to a CPA for good advice and how the “stretch” rules apply to you and could be used to your advantage and the tax implications of the handful of scenarios you’re considering.

I think everyone is forgetting that the OP is a successor beneficiary, not a primary beneficiary.

Grandma died, mom inherited it. Then mom died. That makes OP a successor beneficiary with respect to Grandma's IRA. Importantly, both of those deaths happeend pre-SECURE Act.

As such... OP has to step into mom's shoes. This means that OP needs to take distributions from the IRA based on MOM's life expectancy, using the "minus-1" method mom would have or should have established when she inherited the IRA from grandma (so using mom's age factor as of mom's age in 2017, year after grandma died, then minus-1 each year thereafter).

As far as the 5 year rule... OP has to step into the shoes of MOM's 5 year rule... which would normally have expired Dec 31, 2021 (5 full tax years after grandma's death). Because of COVID, 2020 doesn't count, so in effect, the 5 year period ended Dec 31, 2022.

In effect, the 5 year period option is no longer available to the OP.

Welcome to the old "at least as quickly" rule for dealing with IRAs. OP must draw down grandma's IRA "at least as quickly" as mom would have.

OP needs to calculate the missed RMDs based on mom's scheduled. She needs to take, at a minimum, 2021 - 2023 immediately, and 2024 before year end. 2020, none was required. For 2019, she would need to take one only if mom did not before her 2019 passing.

OP will also need to file a 5329 penalty waiver request for each year of missed RMDs (the penalty is 50% for years before 2023, and 10% for 2023 and later if caught within a period of time). Be honest and explain exactly what happened, that you have fixed it, and you won't make this mistake again.

The IRS typically is pretty forgiving in situations such as this. The rules are confusing.

Also... if OP ALSO inherited mom's owned IRA, then the 5 year period for that one didn't start until 2020, but 2020 didn't count, so really it ends Dec 31, 2025. Or, she could take annual RMDs based on her age the year after mom's death.

This is why it is so important to not comingle IRAs. The brokers are supposed to be on top of this. However, many times, they are not.

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I didn’t get the impression that there was any commingled IRA funds with Mom’s IRA

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Agreed. But I always like to point that out because...

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That’s hard to do with a competent custodian

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You would think. But I've seen it several times. And every time, the custodian says, "oh, we didn't know".

Usually it's a name issue. For example, Slackster Sr dies, leaves IRA to Slackster Jr. When Slackster Jr dies, he leaves his IRA, and the remaining balance of Slackster Sr IRA, to Slackster III.

Slackster III doesn't understand and just tells hiw own custodian, which is not the same as the other two, hey, I need to roll these two IRAs into one for simplicity, and custodian doesn't pay attention to name differences (and sometimes... the registration doesn't even indciate Sr or Jr)

The far worse issue I've only seen once was that the successor beneficiary tried to do a 60 day rollover out of both inherited accounts into their own IRA, and because it was just a check, the custodian didn't pay attention to the source.

Oh, you can't do a 60 day rollover on an inherited IRA, so that's a taxable distribution. Fun times...

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OP needs to calculate the missed RMDs based on mom's scheduled. She needs to take, at a minimum, 2021 - 2023 immediately, and 2024 before year end. 2020, none was required. For 2019, she would need to take one only if mom did not before her 2019 passing.

OP will also need to file a 5329 penalty waiver request for each year of missed RMDs (the penalty is 50% for years before 2023, and 10% for 2023 and later if caught within a period of time). Be honest and explain exactly what happened, that you have fixed it, and you won't make this mistake again.

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This is what I am doing.

Y'all gave great advice that led me in the right path to finding my answer.

I called Fidelity.

They laid out the missed RMD amounts for 2019, 2021, 2022, and 2023.

I withdrew just a few dollars more to make it a more round number today.

I downloaded form 5329 for each year of missed RMDs and wrote a letter explaining breakdown of missed amount each year and will attach a statement showing the funds are now out of the IRA. Basically I just stated the truth. I didn't have an advisor, had no clue what an RMD was or that I needed to be taking them. And explained it won't happen again and I'll take RMDs on time.

Once it's all settled I'll just figure out how much I can take out to close the account in the next year or so and pay off my student loan and get the rest of the money into something I have more control and knowledge of with my advisor.

Thanks all.

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Trying to follow this. Confused though about this situation vs spousal inheritance

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Spousal is a whole different ballgame.

Surviving spouses have the option to roll decedent spouse balance into surviving spouse IRA, and treat combined balance as of it was theirs all along.

This combined account then is subject to your RMD rules.