How Is RMD Calculated for an Inherited IRA?

When someone inherits an IRA, they may be required to take annual withdrawals known as Required Minimum Distributions (RMDs). These withdrawals ensure the IRS collects taxes on tax-deferred retirement savings. The calculation depends on factors such as the beneficiary’s relationship to the original account holder and their life expectancy. Understanding how RMDs work is crucial to avoiding penalties and complying with IRS rules.

Required Distribution Tables

The IRS provides tables to determine the amount that must be withdrawn from an inherited IRA each year. The most commonly used is the Single Life Expectancy Table, which assigns a life expectancy factor based on the beneficiary’s age in the year following the original account holder’s death.

Each factor represents the number of years over which the inherited funds should be distributed. For example, if a beneficiary is 50 years old, the table might assign a factor of 34.2. The first year’s RMD is calculated by dividing the account balance as of December 31 of the previous year by 34.2. The following year, the factor decreases by one, continuing this pattern annually.

The IRS updates these tables periodically to reflect changes in life expectancy. The most recent revision took effect in 2022, adjusting factors for longer average lifespans. Beneficiaries should refer to the latest version to ensure compliance.

Determining the Distribution Period

The length of time over which an inherited IRA must be distributed depends on the beneficiary’s classification and when the original account holder passed away. The SECURE Act of 2019 eliminated the option for many beneficiaries to stretch distributions over their lifetime. Most non-spouse beneficiaries must now fully deplete the account within ten years if the original owner died on or after January 1, 2020.

Certain beneficiaries, known as “eligible designated beneficiaries,” are exempt from the ten-year rule and can use life expectancy-based distributions. This group includes surviving spouses, minor children of the deceased (until they reach the age of majority), disabled or chronically ill individuals, and beneficiaries less than ten years younger than the original account holder. These individuals can extend withdrawals over their own life expectancy, potentially reducing the tax impact.

If the original account holder had already begun taking RMDs before their death, the beneficiary must ensure that the required amount for the year of death is withdrawn. This is separate from the ongoing distribution schedule the beneficiary must follow. Failing to take this final RMD can result in penalties.

Age-Based Adjustments

A beneficiary’s age influences how an inherited IRA is distributed, particularly in terms of tax implications. Younger beneficiaries often have a longer time horizon, allowing them to spread distributions over more years to avoid large spikes in taxable income. Since withdrawals from a traditional IRA are taxed as ordinary income, spacing them out can help prevent being pushed into a higher tax bracket.

For older beneficiaries, managing distributions becomes more complex. If they are already taking RMDs from their own retirement accounts, inherited IRA withdrawals could increase their total taxable income, potentially leading to higher Medicare premiums due to the Income-Related Monthly Adjustment Amount (IRMAA). Strategic timing of withdrawals may help mitigate additional costs.

Inherited Roth IRAs follow different rules, as qualified withdrawals are tax-free. Younger beneficiaries may benefit from delaying distributions until later in the ten-year period to maximize tax-free growth. Older beneficiaries nearing retirement may choose to withdraw funds earlier if they anticipate lower taxable income in the near future.

Calculating the Annual Amount

The required withdrawal from an inherited IRA is based on the prior year’s December 31 balance and the applicable divisor assigned to the beneficiary. The divisor, derived from the IRS Single Life Expectancy Table or the ten-year rule, determines the pace at which funds must be withdrawn. To calculate the RMD, the account balance is divided by the appropriate factor.

If the beneficiary is using the life expectancy method, the divisor decreases by one each year, accelerating the depletion of the account. For example, if a beneficiary inherits an IRA worth $500,000 and their assigned divisor is 30.5, the first year’s withdrawal would be approximately $16,393. The following year, the factor decreases to 29.5, increasing the withdrawal to around $16,949, assuming no account growth.

For those subject to the ten-year rule, the IRS does not mandate annual withdrawals, but the full balance must be distributed by the end of the tenth year. Many beneficiaries choose to spread withdrawals evenly across the decade to manage tax liabilities, especially if their income fluctuates.

Consequences of Missing a Distribution

Failing to take the required minimum distribution from an inherited IRA can result in financial penalties. The IRS enforces strict rules to ensure tax-deferred retirement funds are eventually taxed. Missing a distribution triggers an excise tax on the amount that should have been withdrawn. This penalty was historically 50% of the missed RMD but was reduced to 25% starting in 2023 under the SECURE 2.0 Act. If corrected in a timely manner, the penalty can be further reduced to 10%, provided the missed distribution is taken and reported before the end of the second year following the deadline.

Beyond penalties, missing distributions can lead to unintended tax consequences. If multiple years of withdrawals are missed, the accumulated amount may need to be taken all at once, potentially pushing the beneficiary into a higher tax bracket. This can also affect eligibility for certain tax credits and deductions and increase Medicare premiums. Beneficiaries who realize they have missed a distribution should act quickly to correct the issue and may consider filing IRS Form 5329 to request penalty relief if the failure was due to reasonable cause.