Lynn Brenner: IRA 'kiddie tax' and required minimum distributions

My father died in 2018. My sons and I were his IRA (individual retirement account) beneficiaries. We opened inherited IRAs and began taking distributions in 2020. My sons are in college and not working. Would their distributions be taxed at my tax rate or theirs? Must we empty the IRAs within 10 years?

No. The 10-year distribution rule applies to retirement accounts inherited in 2020 or later. Your father died in 2018, so you're subject to the previous rule: You and your sons can empty your inherited IRAs over your lifetimes, taking annual required minimum distributions (RMDs) based on your respective life expectancies. (You'll find them listed in the Single Life Expectancy actuarial table in IRS publication 590.)

The deadline for taking your first RMDs was Dec. 31, 2019, the end of the year after your father died, says Ed Slott, a Rockville Centre tax accountant. The government waived RMDs in 2020 because of the pandemic. But you were required to take them in 2019, 2021 and 2022.

His advice: Take any RMDs you missed immediately. File IRS form 5329 with your 2023 tax return, reporting the missed RMDs and asking the IRS to waive the penalty. Type in the reason you missed them (confusion about the RMD rules) and say you took them as you as you discovered your mistake.

It sounds as if your sons are subject to the "kiddie tax" rules for dependent children between ages 19 and 23 who are full-time students. For tax year 2023, a child with no earned income pays no tax on up to $1,250 of unearned income. The next $1,250 of unearned income is taxed at the child's rate. Any amount above $2,500 will be taxed at the parents' rate.

The bottom line

Retirement account tax laws periodically change.

More information

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