What Are the RMD Rules After an IRA Owner’s Death?

When an Individual Retirement Account (IRA) owner dies, beneficiaries who inherit the account must take Required Minimum Distributions (RMDs). The rules governing these distributions hinge on the beneficiary’s relationship to the decedent and the date of the owner’s death. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 significantly altered these regulations for most beneficiaries, which impacts the tax implications of an inherited IRA.

Determining Your Beneficiary Category

The SECURE Act established distinct categories of beneficiaries, and the rules you must follow depend on your classification. The primary distinction is between individuals and other entities, with further classifications for individual beneficiaries.

An Eligible Designated Beneficiary (EDB) is a specific type of individual beneficiary. This category includes:

• The surviving spouse of the IRA owner
• A minor child of the owner
• A disabled or chronically ill individual as defined by the IRS
• Any other individual who is not more than 10 years younger than the deceased IRA owner

A Non-Eligible Designated Beneficiary is any individual who is named as a beneficiary but does not meet the specific criteria to be an EDB. This is the most common category for non-spouse beneficiaries, such as adult children, grandchildren, or other relatives and friends.

The final category is a Non-Designated Beneficiary. This applies when the recipient is not a person, such as the deceased owner’s estate, a charitable organization, or certain types of trusts. The rules for this category are the most restrictive.

Rules for Deaths On or After January 1, 2020

For beneficiaries of IRA owners who died on or after January 1, 2020, the rules established by the SECURE Act apply. These regulations created new timelines for distributions, primarily based on the beneficiary classification. The most prominent change was the general elimination of the “stretch IRA” for many, which had allowed distributions to be taken over a beneficiary’s entire lifetime.

Eligible Designated Beneficiaries retain flexible distribution options. A surviving spouse can treat the inherited IRA as their own by rolling it over into their personal IRA, which allows them to delay taking RMDs until they reach the required age. Other non-spouse EDBs can take distributions over their own life expectancy. A special provision applies to a minor child of the owner, who can take distributions based on their life expectancy until reaching age 21, at which point they become subject to the 10-year rule.

Non-Eligible Designated Beneficiaries are subject to the 10-year rule. This rule mandates that the entire balance of the inherited IRA must be withdrawn by the end of the 10th year following the year of the original owner’s death.

Whether annual distributions are required during this 10-year period depends on if the original owner had started taking their own RMDs. If the owner died before their Required Beginning Date (RBD), the beneficiary is not required to take annual distributions but must still empty the account by the 10-year deadline. The SECURE 2.0 Act raised the RBD age to 73 for individuals who turn 72 in 2023 or later.

If the original IRA owner died on or after their RBD, the beneficiary must take annual RMDs in years one through nine, in addition to emptying the account by the 10-year deadline. Due to widespread confusion, the IRS has waived penalties for any missed annual distributions for 2021 through 2024. This relief means the requirement to take these annual RMDs effectively begins in 2025, though the 10-year clock was not paused.

For Non-Designated Beneficiaries, such as an estate or a charity, the rules depend on the owner’s RBD. If the owner died before their RBD, the account is subject to a 5-year rule, requiring it to be fully distributed by the end of the fifth year following death. If the owner died on or after their RBD, distributions must be taken over the deceased owner’s remaining single life expectancy.

Rules for Deaths Before January 1, 2020

If the IRA owner died before January 1, 2020, the beneficiary follows the pre-SECURE Act rules. These regulations were generally more permissive for individual beneficiaries, and the SECURE Act’s 10-year rule does not apply to them.

Under the old rules, any person named as a Designated Beneficiary could take RMDs over their own single life expectancy. This was the popular “stretch IRA” provision that allowed a younger beneficiary to extend distributions, and the associated tax payments, over many decades. A surviving spouse also had the unique option to perform a spousal rollover, treating the IRA as their own.

The rules for Non-Designated Beneficiaries were the same as they are under the SECURE Act. The distribution requirements depend on whether the IRA owner died before or after their RBD.

Calculating and Reporting the Distribution

To calculate an RMD based on life expectancy, you need the IRA’s fair market value and a life expectancy factor. The fair market value is the account balance as of December 31 of the year prior to the distribution, which can be found on the year-end statement provided by the IRA custodian. The life expectancy factor is found in tables published by the IRS in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

Beneficiaries of inherited IRAs must use the Single Life Table to find the correct factor corresponding to their age for the distribution year. The calculation is to divide the prior year-end account value by the life expectancy factor. For example, if the IRA was worth $200,000 at the end of last year and your life expectancy factor from the Single Life Table is 40.7, your RMD for the current year would be approximately $4,914.

After calculating the amount, you must contact the financial institution serving as the IRA custodian to request the distribution. The custodian will report the event to you and the IRS using Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. You must then report this distribution as ordinary income on your personal federal income tax return, typically Form 1040.

Consequences of Failure to Take RMDs

Failing to withdraw the correct RMD amount by the annual deadline results in a penalty. The IRS imposes an excise tax on the shortfall, which is the difference between the amount that should have been withdrawn and the amount that was actually taken.

The standard penalty for a missed RMD is 25% of the shortfall amount. This tax is levied in addition to the ordinary income tax that would have been due on the distribution itself.

There is a provision for reducing this penalty. If the beneficiary corrects the shortfall by withdrawing the required amount and files the appropriate tax form in a timely manner, the penalty can be lowered from 25% to 10%. This correction window extends for two years after the end of the tax year in which the RMD was missed.

It is also possible to have the penalty waived entirely if the failure to take the RMD was due to reasonable cause. To request a waiver, the beneficiary must file IRS Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, for the year of the missed RMD. A letter must be attached explaining the circumstances that led to the error, which the IRS will review.