What Are the Beneficiary RMD Rules for Inherited Accounts?

Inheriting a retirement account requires taking Required Minimum Distributions (RMDs), which are mandatory annual withdrawals. The rules for these distributions were reshaped by the SECURE Act of 2019 and the SECURE 2.0 Act of 2022. This legislation created new withdrawal timelines that apply to accounts inherited from individuals who died in 2020 or later.

The specific rules you must follow depend on your beneficiary classification. This classification is based on your relationship to the deceased account owner and other personal characteristics defined by the Internal Revenue Service (IRS). Understanding your category is the first step to managing the inherited assets and avoiding tax penalties.

Determining Your Beneficiary Category

There are three distinct beneficiary categories, and your classification determines your withdrawal requirements.

An Eligible Designated Beneficiary (EDB) is an individual who meets one of five specific criteria:

• The surviving spouse of the account owner.
• A minor child of the owner, though this status ends when the child turns 21.
• An individual not more than 10 years younger than the decedent.
• A disabled individual, defined as someone unable to work due to a medically determinable, long-term physical or mental impairment.
• A chronically ill individual, defined as someone certified by a health professional as needing assistance with daily living activities or requiring supervision due to cognitive impairment.

If you are an individual beneficiary but do not meet any of the EDB criteria, you are classified as a Designated Beneficiary (DB). This is the most common category for non-spouse beneficiaries, such as adult children or friends of the deceased. Before the SECURE Act, these beneficiaries could often stretch distributions over their own lifetime, a provision that has now been largely eliminated.

The third category is a Non-Designated Beneficiary (NDB). This classification applies to any beneficiary that is not a person, such as the deceased’s estate, a charitable organization, or certain types of trusts.

Applicable Withdrawal Rules

Your withdrawal timeline is dictated by your beneficiary type and whether the original account owner passed away before or after their Required Beginning Date (RBD). The RBD is the date the original owner was first required to take their own RMDs, which is April 1 of the year after they reached age 73.

Eligible Designated Beneficiaries have the most flexibility. Their primary option is to take distributions based on their own single life expectancy, known as the “stretch” option. A surviving spouse has additional options, including treating the inherited IRA as their own by rolling it over into a personal IRA. EDBs can also choose to follow the 10-year rule instead of the life expectancy method.

Designated Beneficiaries are subject to the 10-Year Rule. This rule mandates that the entire balance of the inherited account must be withdrawn by December 31 of the 10th year following the year of the original owner’s death. For example, if the owner died in 2021, the account must be empty by December 31, 2031.

If the original owner died on or after their RBD, a DB must also take annual RMDs in years one through nine of the 10-year period. If the owner died before their RBD, no annual RMDs are required. Because Roth IRA owners have no lifetime RMDs, they are always treated as having died before their RBD, so their beneficiaries are not required to take annual distributions during the 10-year period. The IRS has ended penalty relief for missed annual RMDs, so affected beneficiaries must take these distributions starting in 2025.

The rules for Non-Designated Beneficiaries depend on the timing of the owner’s death. If the owner died before their RBD, the NDB is subject to the 5-Year Rule, which requires the account to be emptied by the end of the fifth year after death. If the owner died on or after their RBD, the NDB must take annual distributions over the deceased owner’s remaining single life expectancy.

Calculating and Taking Your Distribution

The calculation method depends on your specific withdrawal rule. For beneficiaries using the life expectancy method, the annual RMD is found by dividing the account’s fair market value from December 31 of the previous year by a life expectancy factor from the IRS Single Life Table in Publication 590-B.

In contrast, beneficiaries subject to the 10-Year Rule or the 5-Year Rule do not have a required annual calculation. The only mandate is that the entire account balance be withdrawn by the final deadline. This provides flexibility, as a beneficiary can take distributions of any amount at any time within the window, as long as the account is empty by the final date.

To take a distribution, contact the financial institution holding the account. You will need to provide instructions to distribute the specific amount you have calculated or chosen to withdraw for that year.

Tax Consequences and Reporting

Distributions from inherited retirement accounts have tax and reporting requirements. For a traditional IRA, the withdrawn amount is considered ordinary income and is taxed at the beneficiary’s personal income tax rate.

For an inherited Roth IRA, qualified distributions are received tax-free. A distribution is qualified if the Roth IRA was established for at least five years before the withdrawal. If this five-year holding period is not met, the earnings portion of the distribution may be subject to income tax.

The financial custodian will report the distribution to you and the IRS on Form 1099-R. You must report this income on your federal income tax return, Form 1040.

Failing to take a required annual RMD results in a penalty of 25% of the amount that was not withdrawn. This penalty can be reduced to 10% if the beneficiary withdraws the shortfall in a timely manner and files a corrected tax return. This penalty only applies to beneficiaries on a life expectancy schedule who miss an annual withdrawal, not those under the 5-year or 10-year rules unless they fail to empty the account by the final deadline.

If you miss an RMD due to a reasonable error, you can request a waiver of the penalty by filing Form 5329. You must also attach a letter explaining the reason for the missed RMD and the steps you have taken to fix the shortfall.