RMD, estimated income tax for survivng spouse

[ee_guy]

Some what if's regarding RMD, estimated federal taxes and inherited IRA funded with pretax dollars for a married couple with the non- RMD spouse a few years younger than the RMD partner.

Question 1 Situation: the RMD is used to pay estimated taxes in the December following the safe harbor requirements. The RMD is the only source of estimated taxes payment. Person dies before the RMD is taken. Spouse inherits the IRA and takes the RMD in the year of death as required and pays the estimated taxes. Is this allowed? There should be no IRS penalty - correct?

Question 2: In year 2 following the death, the surviving spouse is still not RMD age. Since the IRA is inherited by a spouse, no RMD is required. The 10 year rule does not apply to the surviving spouse. Correct?

Question 3: In year 10, the surviving spouse uses the RMD to pay estimated income tax. The spouse dies before taking the RMD and as result has not paid any estimated income tax. Is there any way to pay estimated income tax by the IRA beneficiaries? It not, the tax penalties will apply.

[Silk McCue]

Question 1: no issues if you are filing MFJ.

Question 2: If the surviving spouse is inheriting an inherited IRA the 10 year rule for withdrawal will apply. Item 4 in the attached link covers this

https://www.irahelp.com/slottreport/10- ... -year-rule

Question 3: Since the beneficiary would not be a spouse on a MFJ return the taxes cannot be withheld from the withdrawal to meet safe harbor. Any funds withdrawn will be taxable to the beneficiary.

Cheers

[CAsage]

For (3) you could advise the now-single survivor to take sufficient withdrawal January 1st to pay the taxes, but regardless as "Silk" noted it's all 100% taxable income and must come out by the 10th year. Consider looking at level-loading that withdrawal in 10 withdrawals, depending on the impact to the now-single survivor's taxes. Which are higher that MFJ. If Single passes, then it goes to the next survivor.

[SuzBanyan]

Just add with respect to #2, if we are talking about a successor beneficiary to an inherited IRA, then the successor beneficiary has to continue the RMDs of the person from whom they inherited it and completely empty it by year 10. For example, my husband inherited an IRA from his father 20 years ago and has been taking RMDs ever since. When my husband passed, I inherited the IRA as a successor beneficiary. I will need to continue my husband’s RMD schedule (1/12.1) this year, 1/11.1 the next etc., but then I must empty the account by year 10.

As to #3, the personal representative of the deceased spouse could make an estimated tax payment as soon as reasonable to minimize the penalties if the spouse died before taking any withholdings.

[ee_guy]

Question 2: If the surviving spouse is inheriting an inherited IRA the 10 year rule for withdrawal will apply. Item 4 in the attached link covers thishttps://www.irahelp.com/slottreport/10-things-k ... -year-rule

Thanks for answering... My question refers to a spouse inheriting the deceased spouse IRA. So the 10 year rule DOES NOT apply. Item 2 from the above says "2. Spouse beneficiaries are not subject to the 10-year rule. "

Also from https://www.irs.gov/retirement-plans/pl ... eneficiary

Death of the account holder occurred in 2020 or later
Spousal beneficiary options
Keep as an inherited account
Take distributions based on their own life expectancy, or
Rollover the account into their own IRA

Further, since the surviving spouse is NOT of RMD age, no RMD is required in year 2 from the deceased IRA assuming it is rolled over. Did I misread something?

[Silk McCue]

Question 2: If the surviving spouse is inheriting an inherited IRA the 10 year rule for withdrawal will apply. Item 4 in the attached link covers thishttps://www.irahelp.com/slottreport/10-things-k ... -year-rule

Thanks for answering... My question refers to a spouse inheriting the deceased spouse IRA. So the 10 year rule DOES NOT apply. Item 2 from the above says "2. Spouse beneficiaries are not subject to the 10-year rule. "

Also from https://www.irs.gov/retirement-plans/pl ... eneficiary

Death of the account holder occurred in 2020 or later
Spousal beneficiary options
Keep as an inherited account
Take distributions based on their own life expectancy, or
Rollover the account into their own IRA

Further, since the surviving spouse is NOT of RMD age, no RMD is required in year 2 from the deceased IRA assuming it is rolled over. Did I misread something?

Your present tense wording led me to believe that the IRA subject to RMDs was an Inherited IRA. My response was based on you inheriting that Inherited IRA.

Cheers

[Alan S.]

Can you clarify if the "inherited IRA" was first inherited by a spouse and then inherited again by that spouse's spouse (successor beneficiary)
OR
The IRA was owned by the first spouse to die and then inherited by their spouse?
Makes a huge difference with respect to your other questions.

Also, when referring to estimated taxes, did you mean to refer to withholding? Estimated taxes are credited only when paid and can trigger a penalty for the first 3 quarters if not paid until 4th Q, while withholding is treated as paid equally throughout the year.

[ee_guy]

Can you clarify if the "inherited IRA" was first inherited by a spouse and then inherited again by that spouse's spouse (successor beneficiary)
OR
The IRA was owned by the first spouse to die and then inherited by their spouse?
Makes a huge difference with respect to your other questions.

Also, when referring to estimated taxes, did you mean to refer to withholding? Estimated taxes are credited only when paid and can trigger a penalty for the first 3 quarters if not paid until 4th Q, while withholding is treated as paid equally throughout the year.

Ah.. the confusion using "pay estimated tax" and "with hold". Here is the scenario. My IRA is funded with pre-tax dollars. I am required to take RMD and in Dec 2023, I will use the RMD and with hold enough to cover my estimated income tax following safe harbor rules. Regardless of the taxes owed for 2023, there is no penalty since with holding is considered timely . The rub is that dying prior to making the with holding tax payment from my RMD. In this situation, my spouse inherits (the right verb/word?) the IRA and has to take my 2023 RMD and hence can make the estimated tax payment and avoid penalties.

Now in year 2 after death, the surviving spouse, if younger than the RMD age, is not required to take a RMD and can stretch payments over her lifetime. Correct?

Alan S. - always appreciate inputs in this forum.

[Alan S.]

Can you clarify if the "inherited IRA" was first inherited by a spouse and then inherited again by that spouse's spouse (successor beneficiary)
OR
The IRA was owned by the first spouse to die and then inherited by their spouse?
Makes a huge difference with respect to your other questions.

Also, when referring to estimated taxes, did you mean to refer to withholding? Estimated taxes are credited only when paid and can trigger a penalty for the first 3 quarters if not paid until 4th Q, while withholding is treated as paid equally throughout the year.

Ah.. the confusion using "pay estimated tax" and "with hold". Here is the scenario. My IRA is funded with pre-tax dollars. I am required to take RMD and in Dec 2023, I will use the RMD and with hold enough to cover my estimated income tax following safe harbor rules. Regardless of the taxes owed for 2023, there is no penalty since with holding is considered timely . The rub is that dying prior to making the with holding tax payment from my RMD. In this situation, my spouse inherits (the right verb/word?) the IRA and has to take my 2023 RMD and hence can make the estimated tax payment and avoid penalties.

Now in year 2 after death, the surviving spouse, if younger than the RMD age, is not required to take a RMD and can stretch payments over her lifetime. Correct?

Alan S. - always appreciate inputs in this forum.

Yes, in the year of death your surviving spouse can still file jointly, and withhold from the year of death RMD she is responsible to complete if you did not. This will work in the same manner as if you took the distribution yourself and withheld.

I take it that you presently OWN this IRA and are not a beneficiary. Your spouse would be the beneficiary of your owned IRA and would be an EDB (eligible designated beneficiary) and therefore not subject to the 10 year rule. As long as (or as soon as) your spouse is over 59.5 she should elect to assume ownership of the inherited IRA. While still responsible for completing your year of death RMD, she would avoid higher beneficiary RMDs and her lower owned IRA RMDs do not begin until she reaches 73. In addition, even if she did not actively assume ownership, failure to take any beneficiary RMD would result in defaulting to ownership anyway.

Re your original Q 2 - as a beneficiary your spouse would be required to take a beneficiary RMD starting in the year after your death. However, if she assumed ownership, beneficiary RMDs are eliminated and lower RMDs as the owner do not start until 73.

Q 3 - At some point your surviving spouse passes and hopefully would have named her own beneficiary. Since she owns the IRA, her beneficiary may or may not be an EDB. If not, the 10 year rule will apply with annual RMDs in years 1-9.

[celia]

I am required to take RMD and in Dec 2023, I will use the RMD and with hold enough to cover my estimated income tax following safe harbor rules. Regardless of the taxes owed for 2023, there is no penalty since with holding is considered timely . The rub is that dying prior to making the with holding tax payment from my RMD. In this situation, my spouse inherits (the right verb/word?) the IRA and has to take my 2023 RMD and hence can make the estimated tax payment and avoid penalties.

I suggest putting your RMDs on auto pay since if you die anytime in December, not yet having taking RMDs, it will likely take at least a month for your wife to change any accounts. She will need to wait for a death certificate and staffing at the custodians is usually lower during the holidays, so things take longer then.

[Alan S.]

If in poor health automatic distributions are best avoided because the payments will be continued to the deceased IRA owner until the beneficiary reports the death and provides sufficient documentation as beneficiary for the custodian to accept the request to terminate payments. This process will vary by custodian. Meanwhile, those post death installments payable to decedent should not have been cashed by the executor and instead should be returned to the custodian for cancellation. If this period carries past a year end, the 1099R will also be incorrect.

This scenario is not what a surviving spouse should have to deal with, but it's even worse for a non spouse beneficiary where the IRA beneficiary is more likely to be different from the will beneficiary. That would result in the executor having to deal with one or more checks as probate assets until returned to the custodian. Since the actual IRA beneficiary is entitled to these funds there would be a problem if the executor cashed the checks and deposited the funds into the estate account. In that case the actual beneficiary will have to recover the money from the estate and the estate will have to deal with the incorrect 1099R. Some IRA custodians may not even cooperate with the return of distribution checks payable to decedent.

Therefore, if in poor health, the RMD should just be completed early in the year.

[ee_guy]

A followup question for the surviving spouse. No estimated taxes have been made for the year. The intent is the use the RMD as with holding using the safe harbor rule. The surviving spouse dies prior to taking the RMD. As a result, no tax has been with held for the year. Is there a penalty assessed for the deceased?

[Alan S.]

A followup question for the surviving spouse. No estimated taxes have been made for the year. The intent is the use the RMD as with holding using the safe harbor rule. The surviving spouse dies prior to taking the RMD. As a result, no tax has been with held for the year. Is there a penalty assessed for the deceased?

I doubt that the IRS would pursue an underpayment penalty for a single decedent, as the IRS is allowed to waive the penalty for a disaster or casualty and I presume death falls under that provision. In addition, if the RMD would have been a substantial portion of taxable income, the safe harbor for the partial year would be 90% of the current year tax liability and that amount would be lower due to no RMD. However, if an underpayment was assessed, the estate would have to pay it.

[ee_guy]

Thanks Alan S.

Now with my questions answered, I will simplify my budgeting by making just one with holding from my RMD in December to cover my estimated tax obligations. No need to worry about quarterly estimated tax payments. I will also stop withholding on all social security payments thus increasing my cash flow for the year.

I have a "what to do in case …" letter to cover the situation of dying before making the with holding for taxes. State estimated taxes will still have to be paid quarterly.