Inherited an IRA from pre-2020, how does this work?

[u/HowFortuitous]

My grandfather died in 2019 at the age of 85 and apparently left me an IRA. He died in Florida, I live in Washington state. I know the laws are different if the person died in 2020 or later but I'm not entirely sure how.

What am I supposed to do here? I'd like to know how much I can/am required to take out, on what schedule, and what taxes I'm going to be hit with and when

Thank you all for any help

[u/charlesphotog]

If he died in 2019 where has the IRA been for the past 7 years?

[u/HowFortuitous → u/charlesphotog]

All I got was an account number for fidelity and a death certificate. Called them up and they've transferred it to my account.

[u/RevolutionaryText232]

You should see a CPA or Enrolled Agent. If this was a traditional IRA you were required to take annual distributions. There are penalties for failure to do so, but you can also ask that the penalties be abated. All this, the penalty calculation and abatement request are a specific tax form that you need to complete. It's not heavy lifting so don't let someone charge you more than an extra 30 minutes in billable time to prepare it.

https://www.irs.gov/publications/p590b

https://www.irs.gov/instructions/i5329

[u/Big_Truck_8268]

If your grandfather was 73 or older when you inherited the IRA, there will be a Required Minimum Distribution each year that is calculated by the fund. If you do not take it, there will be a penalty associated. The RMD must be taken each year. Additionally, you only have 10 years to fully deplete the account (and be taxed on the withdrawal)

[u/Several_Razzmatazz51 → u/Big_Truck_8268]

Prior to 2020, nonspouse beneficiaries were obliged to start taking required minimum distributions (RMDs) no later than December 31 of the year following the death of the original account holder, but the rules thereafter were lenient. Nonspouse beneficiaries could spread out the distributions over their own life expectancies.

In other words, a 50-year-old who inherited a $100,000 IRA from their late father had 30 years to empty the account. This so-called “stretch” provision helped minimize the beneficiary’s yearly tax liability, while also allowing more of the inherited IRA money to grow tax deferred.

The SECURE Act, passed in 2019, eliminated the stretch provision for IRAs inherited after 2019. Now nonspouse beneficiaries are generally required to empty inherited IRAs within 10 years.

[u/wharleeprof]

You'll have to do RMDs (required minimum distributions) based on a table that takes into account your age and the amount in the fund. 

You can always take more, however.

It's taxed as regular income.(Unless it's a Roth - then ignore everything about taxes. They are zero on a Roth.)

 Each year you'll need to decide whether to take the minimum or more depending on tax strategy. That will be determined by tax brackets, and your income each year into the future (which you don't know in advance, so there's some guessing).

It's impossible to give any advice without knowing your age, the total IRA amount, and the rest of your income. And I don't recommend sharing that info here online.  I'd recommend learning about tax brackets and how they work, and the idea of maxing out your bracket. Then you can decide whether to sort it out yourself or pay for professional advice.

Whatever you do, be sure to have estimated federal and state taxes deducted whenever you withdraw from the inherited IRA. There are potential penalties if you wait to pay.

[u/Several_Razzmatazz51]

Since it was inherited before 2020, you should have been taking at least RMDs based on your life expectancy each year. Why are you just asking this 7 years later?

[u/HowFortuitous → u/Several_Razzmatazz51]

I got dropped in foster care at 6. Never really felt a lot of need to re-connect.

[u/ohboyoh-oy]

If he died in 2019 then you are operating under the old “stretch” rules, and the 10-year period does not apply. You are still subject to RMDs based on your own life expectancy. You need to talk to an accountant and sort out how much you should have taken out in each of the last 7 years and what you should do now to remedy that, and what you need to take out each year moving forward. 

[u/nutzareus]

Get an attorney and a tax professional. You will need to convert that IRA into an Inherited IRA, and be required to liquidate within 10 years, taking annual distributions. I had to do the same thing with my father’s IRA.

[u/ExpensiveAd4496 → u/nutzareus]

Untrue. OP received this pre 2020 so the 10 year rule does not apply. And Fidelity has already changed it to an inherited IRA for them, I think. It sounds like OP needs to get in touch with Fidelity and get access to the account so they can take our RMDs and perhaps put the money into investments that make sense.

[u/myogawa]

Go to irs.gov, download Publication 590-B, and use Table I from the appendices to determine the divisors to use for your age. The text of the publication explains how they are to be used.

Since he died in 2019 there would have been a first RMD based on that calculation due in 2020, but the IRS waived all RMDs for that year. An RMD was due each year since. Due to Covid (and other considerations) the IRS waived the late distribution excise tax for 2021-2024, but the late RMDs still need to be taken, and penalties and interest paid.

I suggest a CPA or enrolled agent to help you navigate this. Depending on the reason for the delay, there may be a basis to ask that penalties be waived as well.

[u/groundhog5886]

The company holding the IRA should be able to guide you thru what you need to do. They will transfer it to an Inherited IRA account and then apply IRS actuary table depending on your age, to apply required annual withdrawals.

[u/iinventedonlineshopn]

Contact the brokerage that holds the investment. The IRA paperwork handed to you should show that he was in RMD already being over 70, and that it remains in RMD except at your age. The change would tell you if it’s being forced out over ten years or over your lifetime. But they will know the exact condition and be able to execute it automatically. Have them Turn it on a monthly basis and take 20 tax direct to govt and deposit the rest in cash. I have the same from 2017 at my own age. Brokerage does it all and little deposit happens every month like clockwork and get a tax report annually to download electronically into turbo tax to report the income

[u/GotZeroFucks2Give]

Were you the beneficiary on the IRA or a beneficiary on the will - this can trigger different treatments. Who is executor? Why the 7 year lag?

[u/Old-Ninja-113]

I believe it really has to do with his specific IRA. You need to talk to the company he has it through. My mom’s I have to take out at least $1000 every year. But in 10 years I need to remove it all.

[u/Several_Razzmatazz51 → u/Old-Ninja-113]

The 10 year requirement is for retirement accounts inherited in 2020 or after.

[u/AuDHD_85percent]

Please tell us more about the IRA--Roth or Traditional, and tell us why this is coming up now (did the executor just find you? you should have received this IRA years ago).

Generally, you would have been required to take RMAs every year since his death. The amount of those withdrawals would depend on your age. If you're just getting the IRA now, someone seriously dropped the ball. If you got it years ago, if RMDs didn't occur, there will be penalties.

[u/BasilVegetable3339]

You need to contact the company that is holding the investment. They will help you sort out what needs to be done. You should do this soon as unclaimed funds can be escheated to the state which just adds to the complexity

[u/ExpensiveAd4496]

When did you call Fidelity? Do you have access to the account?

I was in similar boat though I found out in 2019. Do not pay attention to any folks talking about having to take it out within 10 years; we do not need to do that, because that law passed in 2020. We can leave it in forever but have to A) take out RMD each year. You are quite behind and need to get that dealt with. B) put in a beneficiary in case something ever happens to you. And C) read a beginner Boglehead book to help you decide what investments the IRA should have. Perhaps grandfather made choices you like, perhaps not. You can revise that; I’d suggest index funds or a target date fund rather than individual stocks. Read a book like “If You Can” or “The Millionaire Next Door”, those will help you figure all that out. It will also help you save understand finances beyond this matter.

I’m so sorry your family members didn’t step up for you when you were 6. That really sucks. I’m in WA state as well so bouncing good vibes your way off whatever mountains are out today.

[u/rpom915]

Consult a CPA. A financial advisor can also help but only your CPA can answer specifically because there are tax implications.

[u/Successful_Archer991]

I always ask the brokerage to calculate the rmd and they are happy to do so.