Calculating inherited IRA Required Minimum Distributions (RMDs) can feel like navigating a complex maze, but with a clear understanding of the rules, you can manage it effectively. The IRS has specific guidelines, and these have undergone significant changes in recent years, particularly with the SECURE Act. Let's break down how to calculate your inherited IRA RMD, step by step.
Ready to demystify your inherited IRA and ensure you're compliant with IRS regulations? Let's get started!
Understanding Inherited IRA RMDs: The Basics
Before diving into the calculations, it's crucial to understand what an RMD is and why it's required for inherited IRAs.
- What is an RMD? A Required Minimum Distribution (RMD) is the minimum amount of money that must be withdrawn from certain retirement accounts each year. The IRS mandates these withdrawals to ensure that taxes are eventually paid on tax-deferred savings.
- Why do inherited IRAs have RMDs? When you inherit a traditional IRA, the money generally hasn't been taxed yet. The IRS wants to ensure this deferred income is eventually taxed. The rules for inherited IRAs differ significantly from those for an original IRA owner, and they depend heavily on your relationship to the deceased and when the original account owner passed away.
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| How To Calculate Inherited Ira Rmd Irs |
Step 1: Determine Your Beneficiary Category
This is arguably the most critical first step, as your beneficiary category dictates which set of RMD rules you'll follow. The SECURE Act of 2019 brought significant changes, particularly for non-spouse beneficiaries.
Sub-heading 1.1: Spousal Beneficiary
If you are the surviving spouse of the original IRA owner, you generally have the most flexibility.
- Roll it Over: You can roll the inherited IRA into your own IRA (traditional or Roth, depending on the original IRA type). If you choose this, the inherited IRA becomes your IRA, and you'll follow the RMD rules that apply to your own retirement accounts, typically starting RMDs at your own age 73 (or 70.5/72 if you were already subject to RMDs under prior rules). This is often the most advantageous option as it allows for continued tax-deferred growth for potentially a longer period.
- Treat as Inherited IRA: You can also keep it as an inherited IRA (also known as a "beneficiary IRA"). In this case, you'll generally take RMDs based on your own life expectancy. If the original owner was already taking RMDs, you must continue them. If they hadn't started, you can delay RMDs until they would have turned 73, or you can begin distributions based on your own life expectancy.
- Important Note for Spouses Under 59½: If you need access to the funds before age 59½, keeping it as an inherited IRA might be preferable to rolling it over into your own, as withdrawals from an inherited IRA are typically not subject to the 10% early withdrawal penalty.
Sub-heading 1.2: Eligible Designated Beneficiary (EDB)
The SECURE Act introduced the concept of an "Eligible Designated Beneficiary." These individuals are exceptions to the new 10-year rule and can still "stretch" distributions over their life expectancy. You are an Eligible Designated Beneficiary if you are:
Tip: Reread complex ideas to fully understand them.
- The surviving spouse (as discussed above).
- A minor child of the deceased IRA owner (until they reach the age of majority, usually 21, at which point the 10-year rule generally applies).
- A disabled individual (as defined by the IRS).
- A chronically ill individual (as defined by the IRS).
- An individual who is not more than 10 years younger than the deceased IRA owner.
If you fall into one of these categories, you will generally calculate RMDs using your own life expectancy (or the deceased's if it's longer and they had already started RMDs) similar to the pre-SECURE Act "stretch" rules.
Sub-heading 1.3: Non-Spouse, Non-Eligible Designated Beneficiary (Most Common Scenario After SECURE Act)
This category primarily includes adult children and other relatives or friends who inherit an IRA. This is where the 10-year rule comes into play for IRAs inherited after December 31, 2019.
- The 10-Year Rule: If you are in this category, you generally must fully distribute the inherited IRA by December 31st of the calendar year containing the 10th anniversary of the original owner's death.
- If the original owner died before their Required Beginning Date (RBD) for RMDs (i.e., before they turned 73): You are not required to take annual RMDs during the 10-year period. You can take distributions whenever you want, as long as the entire account is emptied by the 10-year deadline. This offers significant tax planning flexibility.
- If the original owner died on or after their RBD for RMDs (i.e., they had already started taking RMDs): You are generally required to take annual RMDs in years 1 through 9 of the 10-year period, based on your own life expectancy. The remaining balance must then be distributed by the end of the 10th year. This rule, clarified by proposed IRS regulations in 2022, was a significant change from initial interpretations of the SECURE Act. It's crucial to be aware of this specific nuance.
Sub-heading 1.4: Non-Person Beneficiary (Estate, Trust, Charity)
If the inherited IRA goes to an estate, a non-qualified trust, or a charity, the rules are different and often more complex, usually resulting in a faster payout schedule (e.g., the 5-year rule or based on the original owner's life expectancy). This scenario typically requires professional tax advice.
Step 2: Gather Necessary Information
Once you know your beneficiary category, you'll need specific data points to calculate your RMD.
- Previous Year-End Account Balance: This is the fair market value (FMV) of the inherited IRA as of December 31st of the year prior to the year for which you are calculating the RMD. Your IRA custodian will provide this information on Form 5498.
- Date of Death: The exact date the original IRA owner passed away. This is crucial for determining which set of rules applies (pre- or post-SECURE Act) and the start of your distribution period.
- Your Birthday: For life expectancy calculations, you'll need your age as of your birthday in the year for which you are calculating the RMD.
- IRS Life Expectancy Tables: These are published in IRS Publication 590-B. The specific table you use depends on your beneficiary category:
- Uniform Lifetime Table: Used by most original IRA owners and by spousal beneficiaries who roll over the IRA into their own.
- Single Life Expectancy Table: Used by most eligible designated beneficiaries and by non-spouse beneficiaries subject to annual RMDs under the 10-year rule.
- Joint Life and Last Survivor Expectancy Table: Used by an original IRA owner whose sole beneficiary is a spouse more than 10 years younger. (Less common for inherited IRAs unless the spouse re-characterizes the IRA as their own.)
Step 3: Calculate Your RMD (Step-by-Step by Beneficiary Type)
Let's break down the calculation based on the most common beneficiary types.
QuickTip: Treat each section as a mini-guide.
Sub-heading 3.1: Spousal Beneficiary (Rolling Over to Your Own IRA)
If you've rolled the inherited IRA into your own IRA, you calculate RMDs just as you would for any other traditional IRA you own.
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Identify Your Age: Determine your age as of your birthday in the current calendar year.
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Find Your Distribution Period: Consult the IRS Uniform Lifetime Table (Table III in Publication 590-B) for your age. This table provides a "life expectancy factor."
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Calculate the RMD: Divide the previous year-end account balance by the distribution period found in the table.
Example: You are 75 and rolled your deceased spouse's IRA into your own. The account balance on December 31st of last year was $300,000.
- Your age: 75
- Distribution Period (Uniform Lifetime Table for age 75): 24.6
- RMD = $300,000 / 24.6 = $12,195.12
Sub-heading 3.2: Spousal Beneficiary (Keeping as Inherited IRA) or Eligible Designated Beneficiary
If you are a spouse keeping it as an inherited IRA, or an Eligible Designated Beneficiary (EDB), you generally use the Single Life Expectancy Table.
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Identify Your Age: Determine your age as of your birthday in the current calendar year.
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Find Your Initial Distribution Period: For your first RMD year, use the IRS Single Life Expectancy Table (Table I in Publication 590-B) for your age.
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For Subsequent Years (Subtracting a Year): In each subsequent year, you'll typically subtract 1 from the previous year's life expectancy factor. However, for most inherited IRAs using the single life expectancy table, you re-figure the life expectancy each year based on your age from the table. It's important to confirm this with your financial institution or a tax professional.
Example: You are a 50-year-old adult child and an eligible designated beneficiary (e.g., chronically ill) who inherited an IRA after 2019. The account balance on December 31st of last year was $200,000.
- Your age: 50
- Life Expectancy Factor (Single Life Expectancy Table for age 50): 34.2
- RMD = $200,000 / 34.2 = $5,847.95
Sub-heading 3.3: Non-Spouse, Non-Eligible Designated Beneficiary (Subject to 10-Year Rule)
This is the trickiest part due to the recent IRS clarifications.
Tip: Compare what you read here with other sources.
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Scenario A: Original owner died before their RBD (no RMDs started):
- No annual RMD is required in years 1-9.
- The entire balance must be distributed by December 31st of the 10th year following the year of the owner's death. You have flexibility on when and how much to withdraw within that 10-year period.
- No calculation needed for annual RMDs. Just ensure the account is empty by the deadline.
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Scenario B: Original owner died on or after their RBD (RMDs had started):
- You must take annual RMDs in years 1-9 of the 10-year period.
- For year 1 (the year after death): If the original owner had not taken their full RMD for the year of their death, you, as the beneficiary, are responsible for taking the remainder of that year's RMD. This is calculated using the original owner's life expectancy factor (if they were using the Uniform Lifetime Table) or their remaining life expectancy.
- For subsequent years (years 2-9 of the 10-year period):
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Identify Your Age: Determine your age as of your birthday in the current calendar year.
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Find Your Distribution Period: Use the IRS Single Life Expectancy Table (Table I in Publication 590-B) for your age. The factor decreases by 1 each year.
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Calculate the RMD: Divide the previous year-end account balance by the distribution period.
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- Year 10: The entire remaining balance must be distributed by December 31st of the 10th year following the year of the owner's death.
Example: You are a 40-year-old adult child who inherited an IRA in 2023 from a parent who passed away in 2022 and had already started RMDs. The account balance on December 31, 2023, was $250,000. (The 10-year period ends December 31, 2032).
- First RMD (for 2023, if your parent hadn't taken theirs): Calculated using your parent's RMD for 2022.
- RMD for 2024:
- Your age: 40
- Life Expectancy Factor (Single Life Expectancy Table for age 40): 44.6
- RMD = $250,000 / 44.6 = $5,605.38
- RMD for 2025: (Assuming account balance is now $240,000 due to distributions and growth/loss)
- Your age: 41
- Life Expectancy Factor (Single Life Expectancy Table for age 41): 43.6
- RMD = $240,000 / 43.6 = $5,504.59
And so on, until the entire balance is withdrawn by December 31st of the 10th year.
Step 4: Take Your RMD
Once you've calculated your RMD, you need to actually take the distribution.
- Contact Your IRA Custodian: Your financial institution (brokerage, bank, etc.) holds your inherited IRA. They can help you initiate the withdrawal. Many institutions will even calculate the RMD for you, but it's always wise to double-check their calculation against your own understanding.
- Distribution Deadline: Generally, RMDs must be taken by December 31st of each year. The only exception is your very first RMD, which can be delayed until April 1st of the year following the year the RMD is due. However, delaying means you'll have two RMDs in that second tax year, which could significantly increase your taxable income for that year.
- Tax Implications: Distributions from traditional inherited IRAs are generally taxable as ordinary income in the year they are received. Distributions from inherited Roth IRAs are generally tax-free if the account has been open for at least five years.
- Penalty for Not Taking RMDs: If you fail to take your full RMD, the IRS imposes a 25% excise tax on the amount not withdrawn. This penalty can be reduced to 10% if the shortfall is corrected within a two-year "correction window" and certain conditions are met. This is a steep penalty, so it's vital to comply.
Step 5: Document and Review Annually
- Keep Records: Maintain thorough records of your RMD calculations, withdrawal dates, and amounts.
- Annual Review: RMD rules can be complex and sometimes change. Review your inherited IRA RMD situation annually, especially if there are any life changes (e.g., changes in beneficiary status, new tax laws). Consider consulting a qualified tax advisor or financial planner to ensure you are meeting all requirements and optimizing your distributions for your tax situation.
Important Considerations and Nuances
- Multiple Inherited IRAs from the Same Deceased Owner: If you inherited multiple IRAs from the same deceased owner, you can aggregate the RMDs and take the total amount from any one or more of those inherited IRAs.
- Inherited IRAs from Different Deceased Owners: If you inherited IRAs from different deceased owners, you must calculate and take separate RMDs from each inherited IRA. You cannot combine them.
- Original Owner Died in the Same Year as RBD: If the original owner died in the year they turned 73 (their RBD) and hadn't taken their RMD for that year, the beneficiary is generally responsible for taking that RMD.
- Trust as Beneficiary: If a trust is named as the beneficiary, the RMD rules depend on whether the trust is a "look-through" or "see-through" trust, which can add significant complexity. Seek expert advice.
10 Related FAQ Questions:
How to: Determine if I need to take an RMD from an inherited IRA?
Quick Answer: You generally need to take an RMD if you inherited a traditional IRA. The specific rules depend on your relationship to the deceased (spouse vs. non-spouse) and when the original owner passed away. Roth IRAs for the original owner do not have RMDs, but inherited Roth IRAs typically do.
How to: Find the December 31st balance for my inherited IRA RMD calculation?
Quick Answer: Your IRA custodian (the financial institution holding the account) will typically provide this information on Form 5498, "IRA Contribution Information," or on your year-end account statements.
Tip: Use this post as a starting point for exploration.
How to: Locate the correct IRS life expectancy table for my inherited IRA?
Quick Answer: The IRS life expectancy tables (Uniform Lifetime Table, Single Life Expectancy Table, Joint Life and Last Survivor Expectancy Table) are found in IRS Publication 590-B, "Distributions from Individual Retirement Arrangements (IRAs)," available on the IRS website (irs.gov).
How to: Handle an inherited IRA if the original owner died before starting RMDs?
Quick Answer: If you're a non-spouse beneficiary, and the owner died before their RMD required beginning date (RBD), you're typically subject to the 10-year rule, meaning no annual RMDs, but the entire account must be distributed by the end of the 10th year after death. Spouses have more options, including rolling it over.
How to: Handle an inherited IRA if the original owner died after starting RMDs?
Quick Answer: If you're a non-spouse beneficiary under the 10-year rule, you generally must take annual RMDs in years 1-9 based on your life expectancy, with the remaining balance distributed by the 10th year. Spouses can usually roll it over or continue distributions based on their own life expectancy.
How to: Avoid the 25% penalty for not taking an inherited IRA RMD?
Quick Answer: Ensure you withdraw at least the calculated RMD amount by the annual December 31st deadline. If it's your first RMD, you have until April 1st of the following year, but be mindful of the tax implications of two RMDs in one year.
How to: Get help if I'm unsure about my inherited IRA RMD calculation?
Quick Answer: Contact your IRA custodian, who often provides RMD calculations. For complex situations or to ensure tax optimization, consult a qualified financial advisor or a tax professional specializing in retirement distributions.
How to: Take a distribution from my inherited IRA?
Quick Answer: Contact your IRA custodian and inform them you wish to take an RMD from your inherited IRA. They will guide you through the necessary paperwork or online steps to initiate the withdrawal.
How to: Distinguish between an inherited traditional IRA and an inherited Roth IRA for RMD purposes?
Quick Answer: Inherited traditional IRAs generally have RMDs that are taxable. Inherited Roth IRAs also have RMDs (for most beneficiaries), but these distributions are typically tax-free if the account has met the 5-year seasoning rule.
How to: Plan for taxes on inherited IRA distributions?
Quick Answer: Distributions from traditional inherited IRAs are considered ordinary income and will be added to your taxable income for the year you receive them. Work with a tax professional to understand the impact on your overall tax bracket and to strategize the timing of distributions, especially if you have flexibility under the 10-year rule.
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