Q.: My dad passed away in April at the age of 76. He had not taken his 2021 RMD from his IRA before he died. Does that need to be taken and if so, who takes it and is it based on his age, my age, the 10-year rule?
– Carl in Tupelo
A.: Carl, I am so sorry to hear of your father’s passing. My condolences to you and your family.
Yes, the Required Minimum Distribution (RMD) he was going to take must be made. I get the impression from the wording in your question that you are the beneficiary.
If that is true, you became the owner of the funds in the IRA as soon as he died as a matter of law. It does not matter what his will or any trust he has says. If you were the named beneficiary, it is your account.
The RMD for 2021 is based on his age and his Dec. 31, 2020, account balance. You will need to take the RMD by Dec. 31, 2021. The taxable income from this RMD should be reported on your 2021 personal tax return, Form 1040.
Going forward, because he died in 2021, the provisions of the SECURE Act apply. Under that Act, a new 10-year rule applies to all beneficiaries that are not a spouse or qualify as another type of “Eligible Designated Beneficiary (EDB).” The only required action in 10-year rule is that the entire account is paid out by the end of the 10th tax year after the year of the original owner’s death. In your case this is Dec. 31, 2031.
The 10-year rule otherwise allows you to take any amount from the IRA account at any time you like. Any taxable income that results is reported on your 1040 for the year in which you distribute funds.
If you are an EDB, you must use a life expectancy method to determine your RMD for 2022 based on your life expectancy from Table I (Single Life Expectancy For Use by Beneficiaries) in the appendix of Publication 590-B and the balance of the account on Dec. 31, 2021. This provides a “stretch” of the amount of time it takes to empty the account and spreads the taxable income over more tax years.
Absent the ability to stretch out distributions as an EDB, it may be tempting to leave the account alone until 2031 to keep your tax bills lower through 2030. However, that would mean the entire account, including earnings over those 10 years, would need to be distributed in 2031. Waiting to take distributions like that could result in a larger tax bill than you would have paid had you taken some of the funds out of the IRA during the 10-year period. A good tax strategy would be to map out your expected income for the next 10 years and try to take more from the IRA in lower income years and less in years you were subject to higher tax rates.
If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide but with offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.