What Are the RMD Rules for an Inherited IRA?

An inherited Individual Retirement Account (IRA) is an account received by a beneficiary after the original owner’s death. These accounts have rules for Required Minimum Distributions (RMDs), which are mandatory annual withdrawals. The regulations depend on several factors, including the beneficiary’s relationship to the decedent and when the original owner passed away.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act altered the rules for beneficiaries, introducing new timelines and classifications that determine how quickly an inherited IRA must be depleted. Understanding these updated rules is necessary for beneficiaries to manage the account properly, calculate withdrawals correctly, and avoid tax penalties for non-compliance.

Determining Your Beneficiary Category

The first step for any individual who inherits an IRA is to determine their specific beneficiary classification under IRS rules. The relationship of the beneficiary to the account owner and other specific characteristics directly influence which set of withdrawal rules will apply.

A surviving spouse is considered a spousal beneficiary and is granted the most flexibility. This category is for the legal spouse of the deceased IRA owner, whose options are distinct from other beneficiaries and are determined by September 30 of the year following the owner’s death.

The next category is an Eligible Designated Beneficiary (EDB). This group of non-spouse beneficiaries includes minor children of the original account owner, individuals who are disabled or chronically ill, and any individual who is not more than 10 years younger than the decedent. Each of these sub-categories has precise definitions under tax law that must be met to qualify for the distribution rules associated with EDB status.

Most non-spouse beneficiaries, such as adult children or grandchildren, fall into the category of Designated Beneficiaries (DBs). This is the default classification for any individual beneficiary who is not a spouse and does not meet the criteria to be an EDB. The SECURE Act impacted this group by eliminating the possibility of stretching distributions over their lifetime.

The final classification is a Non-Designated Beneficiary (NDB). This category applies when the recipient of the IRA is not an individual. Common examples include the decedent’s estate, a charitable organization, or certain types of trusts that do not meet the requirements to be treated as a designated beneficiary.

Distribution Rules Based on Beneficiary Type and Decedent’s Age

Distribution rules depend on the beneficiary’s category and whether the original owner died before, on, or after their Required Beginning Date (RBD). The RBD is the date the owner was required to start taking RMDs, which is age 73 as of January 1, 2023. This distinction determines the withdrawal timeline.

Spousal Beneficiaries

A surviving spouse has several options. They can treat the inherited IRA as their own by rolling the funds into their existing IRA or retitling the account in their name. This allows the surviving spouse to delay taking any RMDs until they reach their own RBD, basing the calculations on their own life expectancy. This is often a good route for a younger spouse who does not need immediate access to the funds.

Alternatively, a spouse can remain a beneficiary of the inherited IRA. If the original owner died before their RBD, the spouse can delay distributions until the year the decedent would have reached RMD age. If the owner died on or after their RBD, the spouse must begin taking RMDs annually based on their own life expectancy, starting the year after the owner’s death. This option can be useful if the surviving spouse is younger than 59 ½ and needs to access the funds without incurring a 10% early withdrawal penalty.

Eligible Designated Beneficiaries (EDBs)

EDBs can take distributions over their own life expectancy, a method known as the “stretch IRA.” This allows for smaller annual RMDs, extending the tax-deferred growth of the account. The calculation uses the beneficiary’s life expectancy factor from the IRS Single Life Table for the year after the owner’s death.

A special rule applies to minor children of the account owner, who can use the life expectancy method for distributions while they are minors. Once the child reaches the age of majority, defined as 21 for these purposes, the rules change. The child becomes subject to the 10-year rule, which begins the year after they turn 21, and the entire account balance must be withdrawn by the end of that 10-year period.

Designated Beneficiaries (DBs)

Most non-spouse beneficiaries are subject to the 10-year rule, which requires the entire balance of the inherited IRA to be distributed by December 31 of the tenth year following the owner’s death. If the owner died before their RBD, the beneficiary is not required to take annual RMDs but must still withdraw the full account balance by the end of the 10-year period.

However, if the original IRA owner died on or after their RBD, the situation is more complex. Proposed regulations require the beneficiary to take annual RMDs for years one through nine, in addition to emptying the account by the 10-year deadline. This requirement has caused confusion, and in response, the IRS has issued temporary relief, waiving penalties for missed annual payments in recent years while it works to finalize the rules.

Non-Designated Beneficiaries (NDBs)

If the IRA owner died before their RBD, an NDB is subject to a 5-year rule. This requires the entire account to be distributed by the end of the fifth year following the year of death, with no requirement for annual RMDs during that period.

If the owner died on or after their RBD, the NDB must take distributions based on the deceased owner’s remaining single life expectancy, known as the “ghost life” rule. Distributions must begin the year after the owner’s death and continue annually until the account is depleted, which can result in a payout period longer than 10 years.

Calculating and Taking Your RMD

For beneficiaries required to take annual RMDs, the calculation begins with the IRA’s fair market value on December 31 of the previous year. This figure is the basis for determining the required withdrawal amount for the current year. The beneficiary must then find their life expectancy factor in the Single Life Table from IRS Publication 590-B. The RMD is calculated by dividing the prior year-end account balance by this factor.

Once the RMD amount is calculated, the beneficiary must contact the financial institution or custodian that holds the IRA to request a distribution. The custodian will process the withdrawal and issue the funds. It is the beneficiary’s responsibility to ensure this is done before the annual deadline, which is December 31.

If a beneficiary inherits multiple IRAs, the RMD must be calculated separately for each account. However, the beneficiary has the option to aggregate the total RMD amount and take the full withdrawal from just one of the inherited IRAs. This rule does not apply to other types of retirement accounts; for example, an RMD from an inherited 401(k) cannot be taken from an inherited IRA.

Tax Treatment and Reporting of Distributions

The tax treatment of a distribution depends on whether the account is a Traditional or Roth IRA. Distributions from a Traditional IRA, funded with pre-tax dollars, are taxable income. The withdrawn amount is taxed at the beneficiary’s ordinary income tax rate for the year the distribution is received.

Distributions from an inherited Roth IRA are usually tax-free because the original contributions were made with after-tax money. For the earnings portion of the distribution to be tax-free, the Roth IRA must have been 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 reports the withdrawal to the beneficiary and the IRS on Form 1099-R. This form details the gross distribution amount and the taxable amount. Box 7 of Form 1099-R contains a distribution code that indicates the nature of the withdrawal, with code ‘4’ signifying a death distribution.

The beneficiary is responsible for reporting this information correctly on their personal income tax return. The taxable portion of the distribution from a Traditional IRA is reported on the “IRA distributions” line of Form 1040. Proper reporting ensures that the correct amount of tax is paid on the inherited funds.

Penalties for Missed RMDs

Failing to take a required minimum distribution by the annual deadline results in a penalty. The IRS imposes a 25% excise tax on the amount that should have been withdrawn but was not. The penalty can be reduced to 10% if the beneficiary corrects the mistake by withdrawing the required amount and filing the appropriate tax form within a two-year correction window.

It is possible to request a waiver of the penalty from the IRS. A waiver may be granted if the beneficiary can demonstrate that the failure to take the RMD was due to a reasonable error and that reasonable steps are being taken to remedy the shortfall. To request a waiver, the beneficiary must file IRS Form 5329.

When filing Form 5329 to request a waiver, the beneficiary should attach a letter of explanation. The letter should detail the circumstances that led to the missed RMD and the corrective actions taken. The IRS will review the request and determine if the penalty should be waived based on the facts and circumstances presented.