Financial Planning and Analysis

Inherited IRA RMDs: Rules, Deadlines, and Key Considerations

Understand the rules and deadlines for inherited IRA RMDs, including distribution calculations, beneficiary options, and key considerations for compliance.

An Inherited IRA allows beneficiaries to receive assets from a deceased individual’s retirement account, but it comes with specific rules on required minimum distributions (RMDs). These rules determine how and when funds must be withdrawn, impacting taxes and long-term financial planning.

Understanding these requirements is essential to avoid penalties and make informed decisions.

Who Is Subject to Required Distributions

Beneficiaries of an Inherited IRA must follow withdrawal rules based on their relationship to the original account holder and when they inherited the account. The SECURE Act of 2019 introduced a 10-year rule for most non-spouse beneficiaries inheriting an IRA after January 1, 2020, requiring the entire account to be emptied within a decade. Annual withdrawals are only mandatory if the original owner had already started RMDs, in which case the beneficiary must continue them based on the decedent’s life expectancy.

Certain individuals qualify as “eligible designated beneficiaries” (EDBs), allowing them to stretch distributions over their life expectancy instead of following the 10-year rule. EDBs include surviving spouses, minor children of the deceased (until adulthood), disabled or chronically ill individuals, and beneficiaries less than 10 years younger than the original account holder. Once a minor child reaches adulthood, the 10-year rule applies.

For non-designated beneficiaries, such as estates, charities, or certain trusts, withdrawal timelines depend on whether the original account holder had begun RMDs. If they had, the balance must be withdrawn over their remaining life expectancy. If not, the account must be emptied within five years.

Calculating Distribution Amounts

The required minimum distribution (RMD) for an inherited IRA depends on the beneficiary’s classification and the decedent’s age at death. EDBs using the life expectancy method calculate annual withdrawals using the IRS Single Life Expectancy Table. The divisor is based on the beneficiary’s age in the year following the account holder’s death and decreases by one each year.

Non-EDB beneficiaries subject to the 10-year rule are generally not required to take annual withdrawals unless the original account owner had already started RMDs. In that case, annual withdrawals must continue based on the decedent’s remaining life expectancy. Regardless, the entire balance must be withdrawn by the end of the 10th year, which can create tax challenges if large amounts remain toward the deadline.

Since inherited IRA distributions are taxed as ordinary income, spreading withdrawals over multiple years can help manage tax liability. For example, a beneficiary earning $80,000 per year who inherits a $500,000 IRA may face a significantly higher tax burden if they withdraw the full amount in the final year rather than taking smaller, evenly spaced distributions. Roth IRAs follow the same withdrawal timelines but allow tax-free distributions, making them a more flexible option for tax planning.

Handling Multiple Inherited IRAs

Managing multiple inherited IRAs can be complex, especially when the accounts have different tax treatments or were inherited from different individuals. Each IRA retains its original characteristics, meaning a beneficiary inheriting both a traditional IRA and a Roth IRA must follow separate distribution rules. Traditional IRAs require taxable withdrawals, while Roth IRAs, if held for at least five years before the original owner’s death, allow tax-free distributions.

If multiple IRAs are inherited from the same person and follow identical distribution rules, such as two traditional IRAs subject to the 10-year rule, the IRS allows beneficiaries to aggregate RMDs and withdraw the total required amount from just one account. This simplifies management and reduces fees. However, if the accounts were inherited from different individuals, each must be handled separately, as the IRS does not allow aggregation across different decedents.

Inherited IRAs originating from employer-sponsored retirement plans, such as 401(k)s or 403(b)s, may have additional restrictions based on the plan’s terms. Some employer plans require a lump-sum distribution or impose stricter withdrawal schedules than IRA rollover accounts. If permitted, transferring an inherited 401(k) into an inherited IRA can provide more control over distributions and investment choices.

Deadlines and Consequences for Missed Distributions

Failing to withdraw the required amount from an inherited IRA on time can result in financial penalties. The IRS imposes an excise tax on missed RMDs, which was reduced from 50% to 25% under the SECURE 2.0 Act of 2022. If corrected within two years, the penalty drops to 10%.

The deadline for taking an RMD depends on the beneficiary type and distribution method. Annual RMDs must generally be withdrawn by December 31 each year, except for the first distribution, which can be delayed until April 1 of the year following the original account holder’s death if they had already begun taking RMDs. Beneficiaries using the 10-year rule are not required to take annual withdrawals unless the deceased had started RMDs, but if they fail to empty the account by December 31 of the 10th year, the remaining balance is subject to penalties.

Spousal Beneficiary Provisions

Spouses who inherit an IRA have more flexibility than other beneficiaries. A surviving spouse can treat the inherited IRA as their own, delay withdrawals, or follow the standard inherited IRA rules.

Electing to treat the IRA as their own allows the surviving spouse to roll the assets into their own retirement account, deferring RMDs until they reach age 73 under current IRS rules. This option benefits younger spouses who do not need immediate access to the funds, as it enables continued tax-deferred growth. If the deceased spouse had already started RMDs, the surviving spouse can use their own life expectancy to calculate future withdrawals, potentially reducing annual taxable income.

Alternatively, a surviving spouse can keep the IRA as an inherited account and take distributions based on their life expectancy or the 10-year rule, depending on whether they qualify as an eligible designated beneficiary. This may be useful if the surviving spouse is younger than 59½ and needs access to funds without incurring the 10% early withdrawal penalty that applies to traditional IRAs. If the spouse later decides to roll the account into their own IRA, they can do so at any time, offering additional flexibility in managing withdrawals and tax liabilities.

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