Inherited IRA in RMD (Research, not real life)

[Wallflower]

So, I do my mother's taxes and after working with her IRA, I ended up going down a research rabbit hole for no other reason than curiosity. (I say this just so no one thinks I've had a loss - nothing like that.) I'm generally the one taking care of the financial stuff so I like having answers.

Mom has an IRA that is in required minimum distribution (RMD). When she passes (hopefully no time soon), that IRA will be split between my two siblings and myself. At that point, I expect it to be pretty small (maybe $15,000 each).

What I'm finding online all seems to say that we'll have to have the RMD recalculated, then continue receiving regular payouts. I've found nothing to indicate if we would be able to cash out the IRA and pay the tax burden in one step, which to my mind would be far easier.

Does anyone know if continuing the RMDs (recalculated for each recipient) is the only option?

[ohgillian]

Hi. I have an inherited IRA. I chose to keep the IRA intact and to take the RMD annually (recalculated based on my age - I don't know a lot about the recalculation), but that was my choice. I could also have taken the funds, withdrawn from the IRA, and paid the taxes.

Now, you've probably read this, but the federal SECURE act that passed in the past few months has changed the landscape here. For the IRA I inherited in 2015, I can take just the RMD for the rest of my life. For any future IRAs that one inherits, I believe the time limit is ten years now. That is, you can no longer "stretch" the IRA payouts over your entire lifespan. This kind of sucks for people who don't want to pay that tax burden all within a ten year period.

But to your situation, with a $15,000 inheritance, you could certainly just withdraw the funds and pay the tax.

ETA: Depending on her income and thus tax bracket, it could make sense for her to withdraw the funds herself, even if you and your siblings pay her for the amount of taxes she will owe. I would expect her tax rate on that distribution would be lower than yours. I'm not saying this is good advice though, lol. 

[Wallflower]

ohgillian, that's really helpful information. Thank you! I doubt she'd be willing to withdraw from the IRA - she resents the RMD and I don't know that I'd get her to see the benefits, but I get where you're going with that.

I just couldn't believe that you wouldn't have the option to cash it out but I wasn't finding that, just a lot about getting the RMD recalculated and continuing with it.

Thanks for indulging my curiosity!!

[ohgillian]

Feb 17, 2020 13:24:12 GMT -5 Wallflower said:

ohgillian , that's really helpful information. Thank you! I doubt she'd be willing to withdraw from the IRA - she resents the RMD and I don't know that I'd get her to see the benefits, but I get where you're going with that.

I just couldn't believe that you wouldn't have the option to cash it out but I wasn't finding that, just a lot about getting the RMD recalculated and continuing with it.

Thanks for indulging my curiosity!!

You're welcome! FYI, it's called a "lump sum distribution." Maybe use that term in your searching. 

[farmvillelover]

I don't know what her tax situation is but if her income is low enough, I'd run some calculators to see if Roth conversions annually make sense.  This would allow you kids to withdraw the Roth portion of her IRA (whatever was converted) after she dies, but not pay any income taxes on the withdrawals.  Otherwise, the $15k you guys receive from a non-Roth IRA would be added to your taxable income in the year(s) you took the withdrawals after her death.

[Wallflower]

Feb 17, 2020 13:34:48 GMT -5 ohgillian said:

Feb 17, 2020 13:24:12 GMT -5 Wallflower said:

ohgillian , that's really helpful information. Thank you! I doubt she'd be willing to withdraw from the IRA - she resents the RMD and I don't know that I'd get her to see the benefits, but I get where you're going with that.

I just couldn't believe that you wouldn't have the option to cash it out but I wasn't finding that, just a lot about getting the RMD recalculated and continuing with it.

Thanks for indulging my curiosity!!

You're welcome! FYI, it's called a "lump sum distribution." Maybe use that term in your searching. 

Bingo - You're right, that's what I needed. Definitely a search term failure on my part.