Once the person is over 70 1/2, you have to start taking RMD right away. The amount will be based on your life expectancy. That’s how I understand it anyway.
Yes. Makes my post moot/ irrelevant.
I have an inherited IRA from my Dad. The financial institution withdraws the RMD amount each year, and transfers it into a different account for me minus the taxes owed.
If you don’t wish to spend too much money talking to an accountant or tax lawyer, call the financial institution that already has your Mom’s IRA and ask them. I think the taxes removed are based on your tax bracket and may therefore affect your taxes for that year. I think you’re indicating that you will immediately dissolve the account and distribute everything? I have no idea what the tax implications are for that, but you need to find out!
I definitely know what mom’s will says. We’ve gone over it together. Aside from some small cash amounts to others, she’s leaving everything to me knowing I’ll follow her wishes dividing things up (concrete things and some cash).
Most of her actual assets are in the IRA. She was hoping to see things like 5K to Friend A, 5K to Friend B, 5K to a couple of sisters, etc. It wasn’t really going to be percentages - except for some for my sister (only sibling) - and she hasn’t settled on that percentage yet. For a long time she wanted the percentage to be 0, but I’ve been able to talk her into leaving something. I’m a big believer in genetics controlling a good bit of who we are/become and with that knowledge I feel lucky to be in my spot - not superior feeling sis hasn’t done anything to “deserve” whatever. I’ve even started to ask mom if she’d be ok with sis getting her house instead of dad’s as hers is in much better shape and has more sentimental value to sis (she grew up there - I lived with dad, but in a different house). Then dad’s could be sold as per my original plan. Until mom’s house is decided dad’s is just a “thought,” and it makes sense if that plan goes into effect I can have sis ask dad’s estate lawyer the best way to do it. Mom had hoped no one but me would know just how much she has with her retirement fund. It’s not a lot. No one is going to become a millionaire. She just didn’t want anyone to be jealous.
Interesting with PA taxes… figures my state would be “different!” Mom is in NY. Most of those she wants to leave money to are in NY. Only two of the grandkids still have their residence in PA along with us. One is in NY (as is sis) and the other is in NC.
I suppose it’s a good thing I don’t mind paying taxes in general. I know my money goes to support only the things I want to support in both my state and country… All the rest of you pay for everything I don’t want to support. 
@greenwitch I love this idea… though mom didn’t want to do that when suggested as she doesn’t like the “new guy” she was assigned. She feels he made a lot of changes to her detriment when he took over - all benefiting him due to commissions. I wonder if we can talk with someone else within the company.
Would like to add one thing to my quote above. Even if you HAVE done the right thing by distributing the funds according to your mother’s wishes, if it’s not written down, you are still subject to family resentment or worse.
Ask any estate attorney about how formerly close families have busted up over inheritance issues, families who would have sworn “that will never happen to us.”
@Creekland - I’m sure you can talk to someone else! His changing things around to benefit his own commission is more than a red flag. The first thing my sister and I did was move Dad’s fund from one institution to a different one, of our choice (after he died). We didn’t even have red flags like that, it was just our preference. You and your Mom could do that now if she wishes.
- also - have your Mom's wishes for the distribution in writing. Her own handwriting. Not something you typed up and printed that she signed, although that's OK. She can write it out simply AND sign it.
Kinda:
The RMD in the year that she dies must be taken out based on her life expectancy. If she has already taken the RMD prior to death, then no additional RMD is needed. If she has not taken the RMD prior to death, then the RMD must be taken prior to Dec 31 at her life expectancy.
The RMD in the year after she dies is taken out based on the individual beneficiaries’ life expectancies.
Note, when a beneficiary is listed in the brokerage records, the IRA passes automatically regardless of any will. So if you mom wants to split the IRA into multiple beneficiaries, her best option is to list them all now. She should call her broker to change/add benies.
Well… this would assume we’re close. I have it written down for my memory needs though. I told her I can handle any resentment - she’s free to do what she wants and I’ll follow through with her wishes. Personally, I think she’s being fair with her thoughts about friends, grandkids, and siblings, etc, though as stated above, I’m trying to tweak her thoughts regarding sis as I can. Sis knows she’s not exactly in terrific standing. She’s more upset that dad didn’t leave her what she thought she should get. She should be lucky dad left her anything. Wanna guess who talked him into that? I seriously blame genetics for how/why the two of us turned out different in our lives - esp since she grew up with the “better” parent TBH. We all (and others) spent years and $$ trying to “fix” what we thought could be fixed. I’m now pretty positive it can’t be, so want her to have a chance to have a house, etc, things many of us take for granted. Then I hope she can keep the place, but that will be up to her.
I have recent experience with inheriting an IRA. It’s kind of a pain, actually.
My mother’s IRA was left equally to me and my sisters. Now we each have an investment account called an IRA-BDA, which continues to earn interest and dividends tax-free. We are each required to withdraw a certain amount yearly (“mandatory distribution”) based on our life expectancy, which is a taxable event. We could also withdraw more than the required amount and pay taxes on it. That’s what I plan to do, over time, now that my husband has retired and our income tax rate is lower. Inheriting an already-inherited IRA-BDA is not a complication I intend to inflict on my children.
I recommend that your mom use cash-in-hand or insurance money to make presents to people, not the IRA.
Alternatively, if she has some nice jewelry or similar, she could do what my mother did and have a list of who gets to choose a piece, or more, and in what order. As executor, that meant I had to bring the whole collection to a bunch of people’s houses, and it took me about a year, but it turned out to be kind of nice having a leisurely visit with my mother’s friends and relatives. I always said, "Mom wanted you to choose something you would really wear, and think of her when you do. My sisters and I already got our first choices, so don’t be concerned about that. "
The problem with that scenario is that YOU will have to pay the taxes on those withdrawals if the IRA is solely in your name as beneficiary. Alternatively, you could send $5k less some amount for taxes to Friend A.
Yes, I am currently the beneficiary of the accounts (all with the same company). I also get almost everything in her estate via her will, and I’m on her current bank accounts as a joint account owner. Mom (correctly) knows I’m not going to rob her or change her plans. This thread’s question is solely wondering if there’s a better tax way to handle things knowing she wants to distribute funds - esp the IRA since that’s a new one for me. Dad just had a very small insurance policy that was easy to handle - then his estate that sis gets to deal with though I’m trying to talk her through some of it as I’ve learned tidbits. Since she has a lawyer - a decent lawyer now after the “really hard to believe you graduated from law school and passed the bar” variety I started another thread on - I’m letting her handle that at her own snail’s pace.
I’m now wondering if she should possibly pull more out herself at her tax bracket to have in savings since almost all she wants distributed comes under the gifting amounts allowed tax free. Just brainstorming as I sit at home on a snow day wondering what else I should be doing… seems odd to have an unexpected day off and I don’t feel like cleaning house.
I was just going to suggest this: distribute to friends from RMD $.
If she needs all of her RMD to live, then she is surely in a very low tax bracket so she should take out more than she needs and keep in savings for distribution to friends, etc.
Then you can inherit IRA without additional complications.
Or, she could gift the amounts now and allow recipients to thank her while she is still alive!
I was the recipient of a small amount from my mother’s brother’s estate; his wife was delighted to receive my Thank You note. Each year my Dad gifts us each some portion of our ‘inheritance’ from his RMD - within the gift allotment. He is so glad to know how it is used.
@Nrdsb4 That link you gave me in post #13 is superb. Thanks! Adding this extra comment in case any other reader is in a similar situation as well as giving my personal thanks…
If that’s the case, take a large withdraw now. Have the taxes hit her bracket. Then keep as cash and distribute the money as requested. You’ll inherit it and gift it tax free.
It’s actually a good way to transfer wealth. Even though you’re subject to RMDs, you still get to grow tax free and can defer taxes.
@yourmomma After having read the Charles Schwab article in more depth, I’ve come to the same conclusion. It actually also has me also wondering if H and I want to sell some of our other investments when the time comes to keep our portion of hers (transferred to me) for the tax advantage. I can’t quite tell if pulling it out as a lump sum is subject to the 10% early withdrawal penalty, but if so, that would be more of a hit than a couple of our other options.
This last part is because our plan once parents are gone had been to reinvest in a winter condo allowing us to snowbird. It seems we’d take a bit of a hit if we wanted to use this money for that vs cashing in other things we’ve invested in.
Once I have actual numbers to calculate I’ll run them, but it’s good to know in advance that my original thought isn’t necessarily the best so I can compare instead of being foolish.
But for now, my plan is to tell mom to go ahead and withdraw the gift amounts (when she’s ready) and tuck them into her savings account so I can distribute from there. Then figure out how much she wants to give sis, if any, or if she’d prefer to give her the house, and redo the beneficiary info if desired.
@Creekland On the inherited IRA you won’t have penalties if you decide to cash it all out. You’ll just get hit with an extra large tax bill. In fact, if you don’t do the RMD plan, the IRS forces you out in 5 years.
Having done the inherited IRA thing in 2016 as a non-spouse, here are some reflections:
(1) Watch the bank fees for “transferring” the account to a new (you) owner. In my case, there were 3 of us, and the bank wanted a $25 fee (each!) if we didn’t transfer the accounts to a new trustee within 30 days. [30 days from when? When our new account(s) at the original bank opened. But see item 2.]
(2) By there being three of us we were able to compare responses (“stories”) from when each of us called. I was told they weren’t going to do anything until they received forms from all beneficiaries (wouldn’t tell us who, how many), another was told they were going to process as received, irrespective of others. I only found out about the $25 fee waiver possibility due to another sister specifically asking, and asking how to avoid. So talk to more than one contact, if you can.
(3) Keep calling and keep good notes of when, who, and what to refer back to. ( I have a lab notebook full of notes, phone numbers and contacts from various financial/legal issues related to the whole process of dealing with the estate/trust.)
(4) Watch it like a hawk! Even though the fee waiver had been agreed to by the bank, and I met the 30 day requirement, I still had to call after they charged me as part of the transfer, and they sent it as a separate transfer (which, by some miracle of modern technology, arrived at the new institution first.)
(5) As a non-spouse beneficiary, the first year’s RMD was based on the original owners life expectancy, as the original owner had already started taking them (but had not taken one that year); future (current) ones are based on mine. I chose not to have taxes withheld due to my specific circumstances. It’s not required.
And hope like anything that you don’t have to deal with Treasury Bonds that don’t have beneficiaries specified - and Gold Medallion Signature requirements on anything.
My sympathies to you for having to deal with these situations.
For our family, the inherited IRA’s have been the best and easiest thing. Both spouse and I inherited some from our parents…the parents had designated percentage splits among the beneficiaries, we didn’t have much trouble with paperwork, and were able to transfer those accounts without any excessive paperwork. We have kept them as inherited IRAs but switched brokerages.
Keeping them as inherited IRAs, we each take our required minimum distributions monthly, with tax taken out. We don’t need larger sums right now, so we leave the rest in there to accumulate.
I would not have been happy to have had to liquidate a large portion of it, and pay the tax on doing that all at once, to share it with my sister. Much better that she got her share as a beneficiary and she can do as she pleases with it.