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Hi,
New to the forum. Son just inherited a TSP (government 401K) and i am having transferred to Vanguard Inherited IRA (november 2020) and starting 72T. plan this year as he had very little income due to the Chinese Corona. Want to take a single withdrawl because of late 2020 death and processing time left in 2020 then convert to monthly or quarterly payments in 2021. Any problems or restrictions with this? Thank you.
Also as a side can anyone advise on how i can copy the template to all my posts? Sorry i am not good with computers but want to follow forum protocol.
Thank You
Stu
You did not provide enough information for a "professional" response. Yes, he can take either the full annual total distribution in accordance with the calculation for a SEPP 72-T, or a prorated amount of 3/12 or 2/12 depending whether the first distribution is in October or November. Regardless of the amount taken in 2020, he can change the FREQUENCY of his distributions of the full annual amount in 2021, or any future year.
However, the SEPP 72-T may not be the best approach because he will be required to take the same annual amount until the later of age 59 1/2 or 60 months. You did not indicate his age, which can have a significant effect as to the amount of the annual distribution, and results in inflexibility in future years.
Without any FACTS, I will give you some reasons why I would consider approaches other than using a SEPP 72-T. First, there isn't any 10% penalty for distributions from an INHERITED IRA. Second, if the person he inherited it from was already 70 1/2 when he died in 2020, and if that person had already taken his RMD in 2020, then your son does not have to take any RMD in 2020. Third, the RMD (REQUIRED MINIMUM DISTRIBUTIONS) from INHERITED IRAs are usually the same amount as under a SEPP 72-T. Fourth, and most importantly, he could take whatever amount he wants in 2020 that makes sense in his 2020 tax situation, which could be significantly more in 2020, but then much less in 2021 and future years when he hopefully resumes working. You/he should probably meet with a financial planner or tax professional to do these calculations and planning.
I forgot to mention that if the person who died was over 70 1/2, and had not taken his RMD, then USUALLY your son would have been required to take it BEFORE transferring the balance to his INHERITED IRA. However, in 2020 RMDs were waived because of COVID-19.
More importantly, I forgot to mention that if the death occurred in 2020, then the SECURE ACT now comes into play. There are no longer "REQUIRED MINIMUM DISTRIBUTIONS" for non-spousal INHERITED IRAs. Instead, 100% of the INHERITED IRA must be distributed no later than 10 years after the year of death. That does NOT mean 10% distributed each year for 10 years. There is complete flexibility as to how much is distributed in any year. This is an even more important reason for your son or you to get professional guidance.
DLZ,
Thank you for that information. Would like to add a few facts and get your additional opinion.
My Son is 27 years of age and his Mother died at age 63 and was not taking any withdrawls or RMDs. Inherited IRA Account balance is approximately $1,400,000.
Have communicated with 2 unrelated Financial professional (one is a CFP, AEP, MSFSs with the Sequoia Financial Group) and according to both of them the TSP is a government plan and thus exempt from mandatory 10 year distributions until "December 31, 2021" According to her (and copy of Secure Act provided) ."on Page 92 Paragraph C there is a provision that pushes the effective date for governmental plans to 12/31/2021 rather than 12/31/2019. Also provided was a TSP reference document stating specifically "The TSP is a government plan as defined in 414(d) of the Code"
This is an exact Quote of Page 92 Paragraph C of the 99 page long Secure Act dated/passed March 29, 2019 that was provided to me:
Governmental Plans -In the case of a governmental plan (as defined in section 414(d) of the Internal Revenue Code of 1986) subparagraph (A) shall be applied by substituting "December 31, 2021" for "December 31, 2019"
If my Son age 27 with Inherited IRA could (?) withdraw 72T it would be approximately $25,000 a year for 33 year (age 60) using the Amortization method and a .49 midterm interest rate based on my estimate. However, I am much more concerned whether the TSP can be stretched or does he have to take it over 10 years? If he takes it over 10 years ( i calculate approximately $180,000 a year ..7% estimated rate return and federal ($46,000) and GA State ($17,000) tax estimates just on Inherited IRA if taken equally over 10 years. Of course he would re-invest the proceeds but would have the flexibility to access the funds without the 10% penalty which is a very big plus. Finally i might add i am 60 years old with a current ($900,000 TSP) and additional $750,000 in Brokerage Account and Roth ($100,000) and a nice $120,000 cash reserve that all will go to my Son when i pass.
Thanks Very much DZL.
Stu
You are correct. New "STRETCH" rules started for TRADITIONAL IRAs and 40-K/403-B plans as of 1/1/2020 for non-spousal beneficiaries, which require INHERITED IRAs to be withdrawn within 10 years after the year of death of the owner of the account in 2020 or later years. This new provision was delayed until 1/1/2022 for Governmental Plans, such as 403-B and 457 plans sponsored by state and local governments, and the THRIFT SAVINGS PLAN (TSP) sponsored by the Federal government (including Congresspersons themselves).
Since your son's mother died in 2020, he is permitted to use the "old STRETCH rules" for the INHERITED IRA from her TSP. Therefore, I see no reason for him to use this account as the basis for a SEPP 72-T plan. There will be no benefit for him to do so. He would be limited to the amount that he could take in 2020 if it were in a SEPP 72-T, and he would have no flexibility in all future years. He would be required to distribute the exact same annual amount regardless of his tax situation. By leaving it in the INHERITED IRA, he can adjust the distributions every year to be greater than the RMD which would be beneficial up to the limit of the 12%, or even the 22% or 24% tax brackets. This flexibility could be very beneficial if/when he gets married, and is filing a joint tax return.
Thank you for your insight. So as an INHERITED IRA if he does not do the 72T is he exempt also from the 10 year distribution rule? Ideally he (we) would leave it in INHERITED IRA and take distributions depending on his income and tax brackets. He is in an industry where his income and steady employment varies significantly year to year ($15-45K).
Also thanks again for your assistance and time.
Stu
I reached out to a guru on retirement plans to clarify per the exchange below:
If the 27 year old son inherits a 457 from his 63 year old mother in 2020, and transfers it to an INHERITED IRA, is he subject to the 10-year INHERITED IRA rules, or excluded because it was from a 457 plan (which provision doesn't start until 2022) ?
If he would be under the SECURE ACT 10-year rule for the INHERITED IRA, how does he avoid the 10-year rule, i.e. what good is the 457 rule ?
If eligible for the 457 rule, even though rolled over to an INHERITED IRA, I guess he has to keep the documentation of the inheritance, just in case the IRS ever audits it. But otherwise, how does the IRS even know about it ? I guess he should attach the documentation to the tax return each year with an explanation.
RESPONSE -- The 10 year rule applies to the type of PLAN, not to the type of account transferred to. Government 457 plans are not subject to the SECURE Act 10 year rule for deaths before 1/1/20222. The plan itself will have the rollover paperwork. (That is, any transfers to an inherited IRA must be initiated through the plan). That should be adequate for IRS purposes. Of course wherever he transfers the money to will have to have a way to mark their records as to the source of the transfer. You shouldn’t have to do anything each year as far as return attachments, etc. . I would remind the client when the transfer is completed that this is a special carveout in the law for future reference – perhaps a memo to the client.
Separately, your son should be aware that the 12% tax bracket is up to $ 53,000 GROSS INCOME (which will be $ 40,000 TAXABLE INCOME after the STANDARD DEDUCTION) as a single taxpayer. However, when he gets married, those figures will DOUBLE as far as the 12% tax bracket to $ 106,000 The 22% tax bracket for singles is $ 98,000 GROSS INCOME, which is $ 85,000 TAXABLE INCOME, and married is twice these figures. The 24% tax bracket for singles is $ 176,000 GROSS INCOME, which is $ 163,000 TAXABLE INCOME, and married is twice these figures.
This will give your son a significant opportunity for flexible tax planning in coordination with his earned income.
One additional point about INHERITED IRAs. The RMD factor/divisor is determined only once, when the first distribution is taken. Then, that RMD factor/divisor is reduced by 1.0 each year, rather than using the IRS usual schedule for RMDs. Your son can always take more than he RMD amount. In either 2021 or 22 (I forget which year), all RMD factors/divisors will be required to be adjusted slightly upward by about 1.0, which will slightly reduce all RMD amounts AUTOMATICALLY by law.
Thanks for both replies and confirming with your Guru. Will keep all transfer paperwork and again thanks for all your advice and help.
Stu
