Calculating RMD on inherited IRA where ben is not individual

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Topic Author
Tarabara
Posts: 48
Joined: Tue Jul 03, 2012 6:44 pm

Calculating RMD on inherited IRA where ben is not individual

Post by Tarabara »

I am requesting help calculating the RMD on an inherited IRA where I am not the individual named beneficiary because it passed through the estate. Respectively, I ask that only people who thoroughly understand this situation respond because I really need an expert.

I have actually inherited 2 IRAs from my aunt. One is fairly easy to calculate because I was the named beneficiary. I used the single life expectancy table and based it on my life expectancy. Vanguard also calculated it for me and came up with the same amount.

On the second IRA I was not the named beneficiary. It passed to the estate and then was divided evenly between the 3 beneficiaries of the estate. Vanguard cannot calculate this for me and so I need help.

Here are the details:
• Birthdate of Deceased: Sept 27 1936
• Date of passing: Feb 14 2011
• Deceased was 74 when she died, but would have turned 75 later in the year.
• The account was divided evenly in 3 and distributed to each of the 3 benefiaries.
• The balance of my portion of the account on December 31, 2011 was $122,835.27.

This is what I found on the irs site:

Beneficiary not an individual. If the beneficiary is not an individual, determine the required minimum distribution for 2012 as follows.
Death on or after required beginning date. Divide the account balance at the end of 2011 by the appropriate life expectancy from Table I (Single Life Expectancy) in Appendix C. Use the life expectancy listed next to the owner's age as of his or her birthday in the year of death, reduced by one for each year after the year of death.

It may seem straightforward but I am still confused, especially about the last part (reduced by one for each year after the year of death).
My Aunt was 74 when she died in February 2011, but her birthday was in September and she would have been 75 that year so I think I use 75. In the table for 75 it says life expectency 13.4 so do I divide the balance by 13.4, or do I devide it by 12.4 because she died in 2011 and it is now 2012? And then what do I use next year, 11.4?

One more question. When I have Vanguard take out the RMD, what percentage of taxes should I have withheld? I am in the 28% tax bracket so should I have them withhold 28%? I am the type of person who does not want to pay in a lot of extra tax at the end of the year.

I really really appreciate the help!
Tarabara
Alan S.
Posts: 12669
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Calculating RMD on inherited IRA where ben is not indivi

Post by Alan S. »

You are on the right track because the quote you included is applicable in your situation, ie the decedent passed after their RBD and the estate beneficiary is not considered a "designated beneficiary" as an estate does not have a life expectancy.

The age of the decedent is based on the age they would have attained had they lived to the end of the year. Therefore, her attained age in the year of death is 75. For estate beneficiary RMDs required to begin no later than 12/31/2012, the 2012 divisor is 12.4, 2013 divisor will be 11.4 etc. Following the divisor reduction of 1.0 each successive year, her IRA will be exhausted around 2024.

It sounds like the IRA was transferred out of the estate to the estate beneficiaries by direct transfer into inherited IRA accounts for each beneficiary. That's the way it should be done but sometimes IRA custodians balk at completing these transfers.

With respect to your RMD withholding, you can have any amount withheld you wish, although Vanguard probably has a min %. You do NOT have to have anything withheld and you may want to make it up with salary withholding or quarterly estimates. It's your choice how to integrate this income with your other tax payments, but @ 28% you are looking at around $3,000 in additional federal taxes for the 2012 RMD.

You should verify with the executor that your aunt had NO basis in her IRA. If she had basis from non deductible contributions (Look for Form 8606 on her last return), you inherit your share and your RMDs will be less than 100% taxable. Of course, you also need to name your own successor beneficiary on the Vanguard inherited IRA.

Finally, your aunt's 2011 RMD needed to be completed and it is not likely she took out the entire RMD by Feb, 2011. Any remaining RMD should have been distributed by the end of 2011. Was it?
Topic Author
Tarabara
Posts: 48
Joined: Tue Jul 03, 2012 6:44 pm

Re: Calculating RMD on inherited IRA where ben is not indivi

Post by Tarabara »

Alan,
Thank you so much for your explanation and this information. This is exactly what I was looking for.

To answer your questions:
Yes, the the IRA was transferred out of the estate to the estate beneficiaries by direct transfer into inherited IRA accounts for each beneficiary.
I did check with the executor and found that my Aunt had no basis in this IRA, all the contributions were pre-tax.
Yes I did set up by own beneficiary on the inherited IRA.
My Aunt's 2011 RMD was satisfied in 2011 from the estate. The executor took care of that.

Thanks again so much for your help,
tarabara
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