Non-Spouse Inherited IRA w/ Beneficiary < 59 1/2

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beandeveloper
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Non-Spouse Inherited IRA w/ Beneficiary < 59 1/2

Post by beandeveloper »

My wife is inheriting an IRA and Roth IRA from a distant relative. The relative was ~73 when he died. (Don't know for sure - but do know for sure he was over 70 1/2.) My wife is 58.

I know my wife will need to:
* Take RMDs.
* Pay taxes on distributions from the IRA.

However, will she be subject to early withdrawal penalties if she takes distributions over-and-above the RMDs while she's less than 59 1/2?

From what I've read I think I'm concluding she would NOT be subject to early withdrawal penalties. (Which seems to fit when looked at from the standpoint that, if the deceased person's age is driving the need for RMDs, it seems to follow that also enables money to be withdrawn without early withdrawal penalties even when the beneficiary is less than 59 1/2.)

Am I understanding this correctly?

Thanks.
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Duckie
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Re: Non-Spouse Inherited IRA w/ Beneficiary < 59 1/2

Post by Duckie »

beandeveloper wrote:My wife is inheriting an IRA and Roth IRA from a distant relative. The relative was ~73 when he died. (Don't know for sure - but do know for sure he was over 70 1/2.) My wife is 58.
Did the Distant Relative (DR) die in 2020? If so, your wife has no yearly RMDs but must empty the IRAs within 10 years. Had DR already taken the RMD for 2020? If not that might need to be removed first.

If DR died in 2019 then your wife will have to take yearly RMDs based on a Table I from Publication 590-B. The 2019 version is here.
However, will she be subject to early withdrawal penalties if she takes distributions over-and-above the RMDs while she's less than 59 1/2?
No.
Topic Author
beandeveloper
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Re: Non-Spouse Inherited IRA w/ Beneficiary < 59 1/2

Post by beandeveloper »

Thanks for the info.

The relative died in 2020. Not sure a 2020 RMD was taken or not. I'll follow up with the trustee.

And I'd forgotten of the new RMD rules. Thanks for the reminder.
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Shackleton
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Re: Non-Spouse Inherited IRA w/ Beneficiary < 59 1/2

Post by Shackleton »

I think the CARES act removed the requirement for taking an RMD in 2020.
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retired@50
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Re: Non-Spouse Inherited IRA w/ Beneficiary < 59 1/2

Post by retired@50 »

Duckie wrote: Sat Nov 21, 2020 7:49 pm
beandeveloper wrote:My wife is inheriting an IRA and Roth IRA from a distant relative. The relative was ~73 when he died. (Don't know for sure - but do know for sure he was over 70 1/2.) My wife is 58.
Did the Distant Relative (DR) die in 2020? If so, your wife has no yearly RMDs but must empty the IRAs within 10 years. Had DR already taken the RMD for 2020? If not that might need to be removed first.

If DR died in 2019 then your wife will have to take yearly RMDs based on a Table I from Publication 590-B. The 2019 version is here.
However, will she be subject to early withdrawal penalties if she takes distributions over-and-above the RMDs while she's less than 59 1/2?
No.
Since everyone is allowed a $0 RMD for 2020, wouldn't that apply to the deceased distant relative too?

Regards,
This is one person's opinion. Nothing more.
Alan S.
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Re: Non-Spouse Inherited IRA w/ Beneficiary < 59 1/2

Post by Alan S. »

Since there is no 2020 RMD, then the DR could not have failed to complete the year of death RMD.

Most likely, your wife will be subject to the 10 year rule, meaning no annual beneficiary RMDs, but the account must be drained by 12/31/2030. She might be better off spreading the distributions over 10 years (11 if 2020 is included) to avoid a spike in taxable income if she waited until late in the 10 year period and took a large distribution.

There is a possible exception to the 10 year rule. If the DR had already inherited the IRA from an original owner prior to 2020, then your wife is a successor beneficiary. Due to wording in the Secure Act, if this fact pattern existed she would have to continue the RMD schedule of the DR (reducing DR's divisor by 1.0 each year including the no RMD year of 2020). Of course, her stretch period under this fact pattern could be shorter or longer than the 10 year rule. There can even be more complexity if DR inherited from their spouse since DR may or may not have attained ownership of the spousal inherited IRA.

Finally, your wife should try to determine if her inherited IRA has any basis left over, since inheriting basis will reduce the taxable portion of her distributions. This may take some investigation, especially given the distant nature of the relative.
Broken Man 1999
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Re: Non-Spouse Inherited IRA w/ Beneficiary < 59 1/2

Post by Broken Man 1999 »

Alan S. wrote: Sun Nov 22, 2020 1:30 pm Since there is no 2020 RMD, then the DR could not have failed to complete the year of death RMD.

Most likely, your wife will be subject to the 10 year rule, meaning no annual beneficiary RMDs, but the account must be drained by 12/31/2030. She might be better off spreading the distributions over 10 years (11 if 2020 is included) to avoid a spike in taxable income if she waited until late in the 10 year period and took a large distribution.

There is a possible exception to the 10 year rule. If the DR had already inherited the IRA from an original owner prior to 2020, then your wife is a successor beneficiary. Due to wording in the Secure Act, if this fact pattern existed she would have to continue the RMD schedule of the DR (reducing DR's divisor by 1.0 each year including the no RMD year of 2020). Of course, her stretch period under this fact pattern could be shorter or longer than the 10 year rule. There can even be more complexity if DR inherited from their spouse since DR may or may not have attained ownership of the spousal inherited IRA.

Finally, your wife should try to determine if her inherited IRA has any basis left over, since inheriting basis will reduce the taxable portion of her distributions. This may take some investigation, especially given the distant nature of the relative.
Finally, your wife should try to determine if her inherited IRA has any basis left over, since inheriting basis will reduce the taxable portion of her distributions. This may take some investigation, especially given the distant nature of the relative.


Alan, could you further explain the statement in italics, please? I can't quite wrap my feeble mind around it!

Thank you, and thank you for the generous help you have provided to so many BHs!

Broken Man 1999
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vtMaps
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Re: Non-Spouse Inherited IRA w/ Beneficiary < 59 1/2

Post by vtMaps »

I think inherited basis means that there had been non-deductible contributions to the IRA. --vtMaps
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Alan S.
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Re: Non-Spouse Inherited IRA w/ Beneficiary < 59 1/2

Post by Alan S. »

vtMaps wrote: Sun Nov 22, 2020 2:04 pm I think inherited basis means that there had been non-deductible contributions to the IRA. --vtMaps
That's right. If the decedent either made non deductible TIRA contributions at anytime or rolled over after tax qualified plan funds to the IRA, those actions would establish basis if documented properly on Form 8606. Due to the pro rate rules, all distributions taken by the decedent would also be reported on Form 8606, and each distribution would reduce the basis somewhat.

When the IRA owner passes, the unrecovered basis (amount showing on line 14 of the last 8606) is inherited by the beneficiary, who then documents that basis on Form 8606, line 2 in the year they first take a distribution.

Many beneficiaries do not think about this issue. While most inherited IRAs include no basis, there are some that have a meaningful amount of basis remaining. If there are more than one beneficiary, the basis must be split proportionately by the portion inherited.
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