Inherited IRA RMD's - I'm puzzled

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wa1fju
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Inherited IRA RMD's - I'm puzzled

Post by wa1fju »

About 20 years ago, I inherited an IRA from my father and my wife inherited an IRA from her father. Both parents were already taking their RMDs when they passed away. The inherited IRAs were transferred to us as our own IRAs and put in CDs at two different banks. We then each started getting yearly RMDs based upon our own ages.

My inherited IRA's check every year is for a different amount. This is because the percentage taken out of the CD is going up and, of course, some of that is offset by the yearly interest that the CD accrues.

But my wife's inherited IRA check is EXACTLY the same amount, year after year after year.

A few years ago, I called the bank holding her account and asked if the RMD calculations were being done correctly. They "researched" it and called me back to tell me, "everything is OK, that's the way the account was set up."

This still remains a mystery to me. The 1099-R's we receive each year show both accounts as a simple/SEP IRA and the distribution code as 4 (death).

Does anybody out there have an explanation as to what's going on?
mhalley
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Re: Inherited IRA RMD's - I'm puzzled

Post by mhalley »

Sure. Bank has no idea what they are doing. It is practically impossible that the RMD amount would be the same each year. Two things affect the RMD.
1. Amount in account on Dec 31 each year. Of course that would not stay the same.
2. Age. Unless you are Dr Who, that also changes each year.
Only way that it could be the same is if they set it up with an amount that is far above what projected rmds would be to say age 90 and that amount is disbursed each year.
It is your spouse’s responsibility to ensure the correct amount is taken out each year, so she should double check the calculations.
https://content.schwab.com/ira/understa ... rited-rmd/
Affable at 50
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Re: Inherited IRA RMD's - I'm puzzled

Post by Affable at 50 »

The required minimum distribution should fluctuate from year to year. Check to see whether there is specific periodic distribution that was setup some time ago and is on autopilot. This would explain what you are seeing.
gavinsiu
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Re: Inherited IRA RMD's - I'm puzzled

Post by gavinsiu »

Rmd cannot be the same year after year. What it could be is that the Ira has a 10 year rule and so it was setup to withdraw 1/10 each year.
mhalley
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Re: Inherited IRA RMD's - I'm puzzled

Post by mhalley »

OP stated rmds have been in effect for 20 years, so that nixes the 10 yr rule.
bonesly
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Re: Inherited IRA RMD's - I'm puzzled

Post by bonesly »

gavinsiu wrote: Sun Feb 11, 2024 11:22 pm Rmd cannot be the same year after year. What it could be is that the Ira has a 10 year rule and so it was setup to withdraw 1/10 each year.
The 10-year rule on inherited IRAs came into law on 1-Jan-2020, so the OP's inherited IRAs are under the rules before that since they were inherited 20 years ago.
wa1fju wrote: Sun Feb 11, 2024 8:39 pm My inherited IRA's check every year is for a different amount ... But my wife's inherited IRA check is EXACTLY the same amount, year after year after year.
I agree with mhalley that the Bank has done something wrong with the wife's IRA RMD calcualtion, but they don't have enough knowledge to identify the problem, so they don't acknowledge that there is a problem.

Schwab has an Inherited IRA RMD Calculator, you could start with first, then check manually using IRS Pub 590b.

The IRS Site indicates the RMD for IRA Non-Spouse Beneficiaries (column 2):

- Distribute using Table I - Single Life Expectancy (for beneficiaries), Appendix B, Publication 590-B
There's a draft of the 2023 version of 590b HERE, but it says "Treasury/OMB Use Only". The 2022 version is HERE.

- Use younger of 1) beneficiary’s age or 2) owner’s age at birthday in year of death
This will be the your wife's age

- Determine beneficiary’s age at year-end following year of owner’s death
This will be how old your wife was on 31-Dec of the year following her father's death

- Use oldest age of multiple beneficiaries
Not applicable I presume if she's the only beneficiary (or could be applicable if the father's IRA was split among several children)

- Reduce beginning life expectancy by 1 for each subsequent year

- Can take owner’s RMD for year of death

You and she should use Pub 590 to determine the correct RMD. Maybe pay a CPA to do it for you. Then present the findings to the bank in-person or in writing with a notary signature. Keep records of the process of documenting what went wrong and who is liable for any tax penalty for under-withdrawal (I'm guessing that will be your wife, but bank errors ... tough to get them to own up to those).
Affable at 50
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Re: Inherited IRA RMD's - I'm puzzled

Post by Affable at 50 »

The rules governing inherited IRAs have changed many times over the years. The changes that were introduced with the secure act do not apply to IRAs inherited prior to Jan 1, 2020.
laketrout
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Re: Inherited IRA RMD's - I'm puzzled

Post by laketrout »

Is there any way that the IRA could have been set up for substantially equal payments under rule 72(t)?
bearwithbear
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Re: Inherited IRA RMD's - I'm puzzled

Post by bearwithbear »

Could the bank have put the funds in an annuity?
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Kagord
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Re: Inherited IRA RMD's - I'm puzzled

Post by Kagord »

As other's have said, it would be highly unusual to have equal payments on an inherited IRA, pre Secure 2.0 Act of 2022.

In the end, it's the taxpayer's responsibility to ensure the proper RMD amount is being withdrawn every year. I'm not sure I agree with this being the bank's responsibility. That being said, with a regular IRA, I think the chances are better of a bank being correct (as they probably have the owner DoB correct), but with inherited IRAs, that needs to be checked and validated more closely.
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wa1fju
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Re: Inherited IRA RMD's - I'm puzzled

Post by wa1fju »

Thanks for all of the comments (so far). I was hoping that this was some sort of IRA type of account, known to everybody but me, that acted like a pension or annuity, but I guess not. Unfortunately, my wife's deceased father along with all of the estate papers are long gone.

It is a very small IRA account, about $10K. I have used the formulas to calculate the RMDs and it looks like she is getting about 1/2 of what she should be getting each year. I am somewhat surprised that the IRS hasn't come running. I mean, they do get copies of the 1099-R and they do get the 5498 form each year that lists the fair market value. Can't the IRS tell that something is wrong? Or maybe they can't because they don't know if she or the deceased had a basis in the IRA.

I think the simplest thing to do would be to close out the account. Of course, I would rather do it in a year where our income is low, and the recent rise in bank interest rates isn't exactly minimizing my other income!

Finally, there is a case where the RMDs would be the same year-to-year. For those mathematically inclined, consider an IRA account that earns a zero return every year. Call the initial value of the account, V. In any given year, the RMD is calculated through a divisor, N, so that the RMD = V/N. The next year, the divisor decrements to N-1 and the RMD = (V - V/N) / (N-1). But that is equal to (VN - V ) / N(N-1) = V(N-1) / N(N-1) = V/N. That is, the RMD for the next year equals that of the previous year. But of course, my wife's IRA is in a CD that does have a positive, nonzero return.
Target2019
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Re: Inherited IRA RMD's - I'm puzzled

Post by Target2019 »

OP,
As the inherited IRA dwindles down, at some point it may make sense to close it, and take the total distribution.

After reading the posts here, I think the bank is getting the RMD wrong. As long as your tax filing reflects what is on the 1099-R sent to you, the IRS is not concerned.
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KingRiggs
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Re: Inherited IRA RMD's - I'm puzzled

Post by KingRiggs »

With only $10k left in the account, I think I'd just take a total distribution, pay the taxes, and buy myself something nice (while toasting the one who left me the windfall for one last time) and move on with my life.
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Alan S.
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Re: Inherited IRA RMD's - I'm puzzled

Post by Alan S. »

The IRS has exerted about 0 effort in enforcing inherited IRA RMDs, never have.

Complex rules are part of the reason that even IRA custodians have issues with doing so. Most likely, this bank also failed to reset the RMD divisors in 2022 to reflect the new RMD tables, although that would have further reduced the RMDs that are likely already inadequate.

I agree that sometime in the near future, possibly when the CD matures, a total distribution should be taken. Hopefully, the bank is not levying any CD early distribution penalties for the RMDs distributed during the CD term.
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HanSolo
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Re: Inherited IRA RMD's - I'm puzzled

Post by HanSolo »

mhalley wrote: Sun Feb 11, 2024 8:52 pm It is your spouse’s responsibility to ensure the correct amount is taken out each year, so she should double check the calculations.
https://content.schwab.com/ira/understa ... rited-rmd/
bonesly wrote: Mon Feb 12, 2024 12:44 am Schwab has an Inherited IRA RMD Calculator, you could start with first, then check manually using IRS Pub 590b.
At the above-cited link, and for an inherited IRA, one should be careful not to click the first link ("jump to the Traditional IRA calculator"), and instead look further down the page for:

"Taking beneficiary life expectancy distributions? [Calculate Your RMD]"

"IRA Owner" means the original owner (the person who died). If it asks for "IRA Balance", click on the "?" (more info) icon. On the form I saw, it means to enter the ending balance as of the most recent December 31.

It would be interesting to know whether or not that tool gives you the same numbers as the bank gave you.

If not, then I think questioning the bank's competence is reasonable. However, if the amount the bank has been distributing is above the actual required distribution, then nobody is running afoul of any rules, since distributing higher amounts is allowed. In any case, as others have said, enforcement of RMD rules is quite possibly not a high priority for the IRS (if it were, they'd wind up spending a lot of time trying to communicate with elderly people who get confused easily, who aren't well, and/or don't have a lot of money to begin with).
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celia
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Re: Inherited IRA RMD's - I'm puzzled

Post by celia »

wa1fju wrote: Mon Feb 12, 2024 7:03 am Finally, there is a case where the RMDs would be the same year-to-year. For those mathematically inclined, consider an IRA account that earns a zero return every year. Call the initial value of the account, V. In any given year, the RMD is calculated through a divisor, N, so that the RMD = V/N. The next year, the divisor decrements to N-1 and the RMD = (V - V/N) / (N-1). But that is equal to (VN - V ) / N(N-1) = V(N-1) / N(N-1) = V/N. That is, the RMD for the next year equals that of the previous year. But of course, my wife's IRA is in a CD that does have a positive, nonzero return.
That's not how the divisor is determined. The percentage to be withdrawn each year is different than that and depends on the beneficiary's starting age. See the appendices at the back of Pub 590-B.

And note that the percentages to be withdrawn have a faster drawdown for a beneficiary compared to withdrawing from one's own IRA.

I agree the best way to get out of this is to withdraw the rest of the account asap (as soon as you realized not enough RMDs weren't being taken).

And don't use a bank for any IRAs anymore. They don't have very many IRAs, thus are unfamiliar with the correct way to handle them.
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wa1fju
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Re: Inherited IRA RMD's - I'm puzzled

Post by wa1fju »

Response to celia:

Not to beat a dead horse, but I was under the impression that back 20 years ago when this inherited IRA was set up, they computed an initial divisor factor and then it subsequently gets decremented by one every year thereafter.

In fact, I found an RMD calculator on Voya Financial's site where they say the following:

"For non-spouse beneficiaries the IRS Single Life Expectancy table value is found the beneficiary's age on December 31st of the year following the owner's death. Future distributions subtract one for each year that has passed from the original life expectancy. It is not allowed to lookup or "recalculate" a new starting life expectancy after distributions have begun."

Presumably, the reference to life expectancy is the divisor factor I've been talking about. Or perhaps I'm all wrong. I'm wrong about a lot of things!

But ultimately I agree, the IRA CD will be closed this tax year.
mhalley
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Re: Inherited IRA RMD's - I'm puzzled

Post by mhalley »

Found another way to have static rmds. You can setup an annuity (spia) inside an ira (that ONLY contains the spia) and have the annuity payments be the rmds, but nothing op posted suggested there was an annuity.
WCI discusses that here
https://www.whitecoatinvestor.com/indiv ... d-dilemma/
transfer the money from your Individual Retirement ARRANGEMENT into an Individual Retirement ANNUITY. Once you do that, the money is out of the Individual Retirement ARRANGEMENT, and so the RMDs from that account are calculated on the now smaller amount. The monthly payments from the Individual Retirement ANNUITY constitute the RMD. Since that money has never been taxed, the entire monthly payment is fully taxable, just like an RMD from a tax-deferred retirement account.
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wa1fju
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Re: Inherited IRA RMD's - I'm puzzled

Post by wa1fju »

Thanks, mhalley:

I would be happy if it was some sort of annuity, because that might explain a lot. But the account looks and acts just like a CD. It is labeled as a CD, has a maturity (and auto-renews) just like a CD, pays interest just like a CD, etc. There is no early withdrawal penalty when the RMD is sent which is typical of IRA CDs.

I guess I will find out if it is something other than a CD when my wife goes to close it.
Alan S.
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Re: Inherited IRA RMD's - I'm puzzled

Post by Alan S. »

wa1fju wrote: Mon Feb 12, 2024 2:44 pm Response to celia:

Not to beat a dead horse, but I was under the impression that back 20 years ago when this inherited IRA was set up, they computed an initial divisor factor and then it subsequently gets decremented by one every year thereafter.

In fact, I found an RMD calculator on Voya Financial's site where they say the following:

"For non-spouse beneficiaries the IRS Single Life Expectancy table value is found the beneficiary's age on December 31st of the year following the owner's death. Future distributions subtract one for each year that has passed from the original life expectancy. It is not allowed to lookup or "recalculate" a new starting life expectancy after distributions have begun."

Presumably, the reference to life expectancy is the divisor factor I've been talking about. Or perhaps I'm all wrong. I'm wrong about a lot of things!

But ultimately I agree, the IRA CD will be closed this tax year.
The annual 1.0 divisor reduction is generally correct, but in 2022 the IRS issued new RMD tables that slightly reduces RMD %s.
The divisors need to be "reset" by using the new 2022 single life table to determine what the initial divisor would have been had the new tables existing in the first RMD year. Then reduce that divisor by 1.0 for each subsequent year since the first RMD year. Your 2022 and later RMDs will be slightly lower. But if you don't want to bother with resetting, that's OK because the slightly higher distribution will exceed your RMD.

Agree - vacate the bank as your IRA custodian.
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