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IRAs

Need an RMD for 2023…Perplexed?

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When is your Required Beginning Date (RBD) to take the first RMD?  Your first RMD (required minimum distribution) must have been taken by April 1 of the year following the year in which you reached 72 for those who reached age 72 by Dec. 31, 2022. The first RMD for those turning 72 after Dec. 31, 2022 must be taken by April 1 of the year following the year you turn 73. After that, your RMDs must be taken by Dec. 31 of each year.

Beneficiary of an IRA account? (Rules below apply to IRA owners who passed away after Jan. 1, 2020)

An individual non-spouse beneficiary must distribute the entire account balance by the 10th calendar year after the account owner’s death. If the IRA owner reached his required beginning date, the beneficiary must take annual RMDs based generally on his own life expectancy. These RMDs must begin by December 31 of the year after the owner’s death. Although the beneficiary must take annual RMDs, you will need to fully distribute the account within ten years from the owner’s date of death.

If the IRA owner passed away before the RBD, the RMDS are not required. However, the entire account balance must be distributed within ten years from the owner’s date of death.

The IRS is providing relief to heirs of inherited IRAs who are subject to the 10-year rule, allowing them to skip required minimum distributions in 2023. However, there are reasons why one should take an RMD in 2023, although not required:

  • If he has high medical expenses, the medical expenses will offset the RMD income eliminating the income tax on the RMD
  • By taking an RMD in 2023, he will have a smaller balance to distribute in year ten, avoiding a bunched higher RMD at higher tax rates

If an estate is the beneficiary of an IRA, and the account owner reached his RBD, the estate must make distributions based on the remaining life expectancy of the IRA owner. If the IRA owner passed away before his RBD, the assets must be completely distributed within five years of the owner’s passing, but no annual RMD is required.

IRA owner passed away in 2023? If the IRA owner passed away in 2023 prior to taking this year’s RMD, the beneficiary, whether an individual or an estate must distribute the RMD by the end of 2023.

Want to save income taxes on the RMD? – Use a Qualified Charitable Distribution (QCD) in 2023 For IRA owners with charitable intentions, there is a substantial tax benefit using a QCD. The owner contributes all or part of his RMD to charity. The portion contributed to charity will not be taxed. QCDs can be made as early as age 70.5, even though minimum distributions are not required until age 73. A QCD may only be made by an original account owner, not by a beneficiary.

What happens if I don’t take the RMD in 2023? If an account owner fails to withdraw an RMD, the amount not withdrawn is taxed at 25% (reduced from 50% for missed RMDs prior to Dec. 31, 2022).

Still confused? Everyone’s situation is different. Please consult with a tax advisor at Urbach & Avraham, CPAs, to analyze the impact on your personal situation.

ABCs of 2022 RMDs

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Perplexed? Need to take an RMD in 2022?

Over age 72? – The age for withdrawing from retirement accounts was increased in 2020 from 70.5 to 72. Your first RMD (required minimum distribution) must be taken by April 1 of the year following the year in which you turn 72. After that, your RMDs must be taken by Dec. 31 of each year. However, if you became 72 in 2022, you may want to withdraw the first RMD in 2022. This will avoid having two RMDs in 2023 and bunching income into higher tax brackets.

Beneficiary of an IRA account?– An individual non-spouse beneficiary must begin taking RMDs on the basis of his or her own life expectancy by December 31 of the year after the owner’s death. If the original retirement account owner passed away in 2022 prior to taking this year’s RMD, it still must be withdrawn. The responsibility for taking the year-of -death RMD falls to the beneficiary.

Although the RMDs are calculated based on the beneficiary’s life expectancy, if the original account owner passed away after Jan. 1, 2020, you will need to fully distribute the account within ten years from the owner’s date of death. In the tenth year, the balance of the account will need to be distributed.

If an estate is the beneficiary of an IRA, and the account owner reached age 72, the distributions would be based on the remaining single life expectancy of the IRA owner. If the original account owner passed away in 2022 prior to taking this year’s RMD, the estate must withdraw it by the end of the year. If the owner was younger than 72, the assets must be completely distributed within five years of the owner’s passing, but no annual RMD is required.

Want to save income taxes on the RMD? – Use a Qualified Charitable Distribution (QCD) in 2022 For IRA owners with charitable intentions, there is a substantial tax benefit using a QCD. The owner contributes all or part of his RMD to charity. The portion contributed to charity will not be taxed. QCDs can be made as early as age 70.5, even though minimum distributions are not required until age 72. A QCD may only be made by an original account owner, not by a beneficiary.

What happens if I don’t take the RMD in 2022? If an account owner fails to withdraw a RMD, the amount not withdrawn is taxed at 50%.

Still perplexed? Everyone’s situation is different. Please consult with a tax advisor at Urbach & Avraham, CPAs, to analyze the impact on your personal situation.

Tax Ramifications of Inheriting your Spouse’s IRA

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No one wants to think about losing a spouse, but it’s good to understand how finances work when one does. For example, inheriting an IRA from your spouse can get complicated. Consider the following points.

Age is important

It generally makes sense to roll over an IRA inherited from a spouse to your own IRA if you’re age 59½ or older when you inherit it. Why? You can withdraw money from your IRA if you need to without worrying about the 10% early withdrawal penalty. And the rules for taking annual minimum distributions from the IRA won’t apply until you turn age 70½.

If you’re younger than age 59½, you may be better off setting up an inherited IRA in your deceased spouse’s name. Withdrawals from an inherited IRA aren’t subject to the 10% early withdrawal penalty regardless of the beneficiary’s age.

With an inherited IRA, most beneficiaries must take required minimum distributions every year based on their life expectancies (generally starting the year after the IRA owner dies). However, with an IRA inherited from a spouse who dies before age 70½, the surviving spouse can postpone taking required minimum distributions until the year the deceased spouse would have turned age 70½.

In either scenario, withdrawals will be subject to federal (and possibly state) income tax unless they’re qualified Roth IRA distributions.

Extra Tax Tip-  Look for Form 8606! One should always review prior years’ tax returns to see if the spouse filed a Form 8606- Non-deductible IRAs. It is possible that a portion of the IRA has a non-deductible component. Upon making subsequent withdrawals,  a portion of the withdrawal will be non-taxable.

Look at the big picture

Before making any decisions, meet with one of our financial professionals to review your overall financial situation. For example, maybe you’d be better off spending life insurance proceeds than taking money from an IRA prematurely.  Also, we work together with your investment advisor to review how the IRA assets are invested in terms of your financial needs and overall investment program.

To learn more about tax rules and regulations, give us a call today. Our knowledgeable and trained staff is here to help.

Inherited an IRA? Look Before you Leap!

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If you inherit a traditional individual retirement account (IRA), you also may inherit a large income-tax burden.

Do NOT Pass Go without consulting your CPA

How you choose to receive the money will be a big factor. If you don’t need the

money right away, there are ways you can defer or spread out the tax burden.

When You Are the Surviving Spouse

If you are the deceased IRA owner’s surviving spouse and beneficiary, you have several ways to defer income taxes on the money. One way is to roll over the inherited IRA into your own new or existing IRA. A rollover allows the assets to continue to grow tax deferred until you reach age 70½. Then, annual IRA withdrawals become mandatory.

When You Are Not the Surviving Spouse

The IRA distribution rules differ when you aren’t the spouse. But you can still spread out the tax burden. One option may be for you to receive annual distributions from the IRA based on your life expectancy. This will spread out the distributions — and the taxes — over a number of years. The younger you are, the longer you can stretch out the payments, and the longer the money can stay in the account and benefit from potential tax-deferred growth. This particular option is not available if the account had no designated beneficiary.

Inherited IRAs are subject to potential risks, such as tax law changes and the impact of inflation.

Give us a call before you make any moves, so we can help you determine the right course of action for you.