Required Minimum Distribution ("RMD") rules from inherited IRAs
There are lots of areas of the U.S. tax code relating to retirement that are more complicated than they need to be. In my opinion, the most unnecessarily complicated area of the tax code regarding retirement is around required minimum distributions from inherited IRAs.
When someone owns an IRA and dies, the account is left to whomever the original owner designated as the account’s beneficiaries. Beneficiaries have to eventually distribute money out of the inherited account. However, there are various layers of “if this, then that” rules around when exactly the beneficiary needs to take distributions, and how much.
Below is a summary of the rules for Required Minimum Distributions (“RMDs”) from inherited IRAs. Please note these rules are subject to change (as they have multiple times over the last few years), but these summary addresses what they as of the writing of this newsletter.
Additionally, this summary applies only to inherited IRAs where the original account owner died after 2019. There are different RMD rules for inherited IRAs where the original account owned died before 2020. But presumably anyone reading this who is the beneficiary of such an IRA has already figured out what the account’s RMDs are, so I’m not summarizing the rules here.
First, there are three classifications of beneficiaries to be aware of, as RMDs vary based on which classification the beneficiary is.
Eligible Designated Beneficiary (“EDB”) – a living/breathing person (or a qualifying see through trust for said person) who is:
- The original account owner’s spouse
- The original account owner’s minor child (where “minor” means the child is not yet 21 years old). But NOT the original account owner’s grandchild
- a disabled person
- a chronically ill person
- a person not more than 10 years younger than the original account owner (such as the original account owner’s sibling or a parent)
Non-Eligible Designated Beneficiary (“NEDB”) – any leaving/breathing person (or a qualifying see through trust for said person) who isn’t an EDB
Non-Designated Beneficiary (“NDB”) – anything that’s not a living/breathing person such as a charity, the person’s estate, a business, a non-qualifying trust, an animal, etc.
Before getting into the specifics of the inherited IRA RMD rules, I want to start by mentioning how inherited IRAs are generally opened and titled at the financial custodian who holds the account.
For example, assume the original account owner’s name was John Smith. While he was alive, John’s IRA at his custodian would have been titled something along the lines of, “Custodian XYZ IRA fbo John Smith.”
Assume John dies and leaves his IRA to his brother, Frank Smith. The custodian would then open a separate inherited IRA for Frank and transfer into it the contents of John’s original IRA. Frank’s inherited IRA would typically be titled something like, “Custodian XYX Inherited IRA fbo Frank Smith beneficiary of John Smith IRA”
Okay, let’s now get into the good stuff!
Here are the RMD rules for Eligible Designated Beneficiaries:
Spouses are a special sub-class of EDBs. Spouses have the unique ability to take the deceased’s IRA and make it their own instead of making it an inherited IRA. In other words, instead of being required to open up a new inherited IRA (such as in the example above where John Smith leaves his IRA to his brother Frank Smith), the surviving spouse can roll the decease’s IRA into their own.
For example, let’s again assume John Smith was the original account owner. Let’s assume John was married to Sue Smith. Further assume Sue also already had her own IRA at the same Custodian XYZ, and that account was titled something like “Custodian XYZ IRA fbo Sue Smith.” After John dies, if Sue was named as the sole primary beneficiary of his account, Sue has the option to roll John’s IRA into her own existing IRA instead of having to open a newly created inherited IRA.
Conversely, for all non-spouse EDBs, the inherited account will need to be opened up as a separate inherited IRA.
If/when Sue rolls John’s IRA into her own, there are then no special inherited RMD rules that will apply to her account. Simply put, the money transferred in from John’s IRA will look and feel as if it was always in Sue’s IRA. As such, the RMD rules that will apply to Sue’s IRA are the normal RMD rules that apply to an IRA owner’s own account; not an inherited account.
For the other four classes of EDBs (i.e. the original owner’s minor child, disabled persons, chronically ill persons and/or persons not more than 10 years younger than the original account owner), they may use the “stretch” RMD rules. Additionally, if they want to, spouses can opt to open a separate inherited IRA and use the stretch provisions as well; spouses aren’t required to make the deceased’s IRA their own.
The term “stretch” refers to the ability to take RMDs over the beneficiary’s remaining life expectancy. All else equal, the younger the beneficiary, the longer the number of years they have to take RMDs out of the inherited account.
The annual RMDs required under the stretch rules are stipulated by the IRS in its Single Life Expectancy Table. See the example below for how to calculate RMDs in this case.
RMDs from an inherited IRA are required to begin the calendar year after the year in which the original account owner died.
If the original account owner was of RMD age when they died (i.e. it was later than April 1 following the year they turned 72 or 73; depending on their year of birth), the inherited IRA owner using the stretch RMD rules must take RMDs using the longer of their own life expectancy or the life expectancy of the original owner when they died. In other words, if the beneficiary is younger than the original account owner was at death, use the beneficiary’s age to determine RMDs. Conversely, if the beneficiary is older than the original account owner was when they died, use the original account owner’s age at death to determine RMDs.
Example: Assume the original IRA owner dies in 2024 at 76 years old. They leave their IRA to their 71 year-old sister (the sister turned 71 in early-2024, which means she’ll still be 71 as of the end of the year). The sister is an Eligible Designated Beneficiary, or EDB, since she is 1) a living/breathing person and 2) not more than 10 years younger than the deceased.
The original account owner was of their own RMD age, as they were older than 72 or 73. The beneficiary is younger than the original account owner was, so the beneficiary is to take stretch RMDs based on their own life expectancy (as opposed to over the deceased’s life expectancy).
Since RMDs from the inherited account don’t need to start until the calendar year after the year of death, the beneficiary will be a year older, or 72, as of the end of 2025, which is the year in which her inherited RMDs are required to begin.
Per the Single Life Expectancy Table, the life expectancy factor for a 72 year old is 17.2.
In order to determine the dollar amount of RMD to be taken from the inherited account in 2025, divide the inherited IRA account value as of December 31 of the prior year (i.e. December 31, 2024) by the 17.2 life expectancy factor. For example, assume the inherited IRA was worth $500,000 as of December 31, 2024. The sister’s inherited IRA RMD for 2025 would be $500,000 / 17.2, or $29,069.77.
In addition to having to take the first year’s inherited account RMD in 2025, the sister will need to take an RMD every year going forward until the inherited IRA is eventually depleted. For each year after the first year, the life expectancy factor is the prior year’s factor minus 1.0. Do NOT use the new/older age’s factor from the Single Life Expectancy Table in subsequent years. For example, the life expectancy factor to be used for 2026’s RMD is 17.2 - 1.0 = 16.2. The life expectancy factor to be used for 2027’s RMD will be 15.2, etc.
Clear as mud, right???
I should mention that RMDs are just the minimum amount the beneficiary needs to take out each year. The beneficiary is free to take out more than that if they choose to. But they need to take out at least as much as the RMD each year. Otherwise, there is an excise penalty tax on the amount of RMD that should have been taken but wasn’t (Not to go too far down the rabbit hole of missed RMD penalties, but the penalty is 25% of the amount not taken or, if corrected within two years, the penalty is 10%).
Here are the RMD rules for Non-Eligible Designated Beneficiaries:
For any living/breathing person who is NOT an Eligible Designated Beneficiary, or EDB, they will be subject to the “10-Year Rule” for distributions from the inherited IRA.
The 10-Year Rule says that the inherited account must be fully distributed by the end of the 10th year following the year of the original account owner’s death. For example, if the original account owner dies in 2024, the inherited account must be fully distributed no later than December 31, 2034.
But wait, there’s more! If the original account owner was not old enough to be required to start their own RMDs, the beneficiary does not need to take any annual RMDs during their 10-year period; they simply need to make sure the account is fully distributed before the end of the 10thyear following the year of death.
If, on the other hand, the original account owner was of an age where they needed to start taking their own RMDs, then the beneficiary does need to take annual RMDs from the inherited account during their 10-year period, and they still have the requirement to completely empty the account by the end of the 10th year following the year of death.
The annual RMDs required under this scenario are calculated similar to the examples above for EDBs, using the Single Life Expectancy Table. The beneficiary uses their own age (not the age of the original account owner when they died) to determine the life expectancy factor for their first year of RMDs. And then in each subsequent year, they subtract 1.0 from that first year’s life expectancy factor.
And, same as before, the beneficiary’s RMDs don’t need to start until the year after the year of death.
And, also same as before, if RMDs are required but not actually taken, the IRS will assess an excise penalty/tax. However, to further complicate things, the IRS is temporarily waiving enforcement of this excise penalty for missed RMDs under the 10-Year Rule for Non-Eligible Designated Beneficiaries, or NDBs. Specifically, the IRS has waived the penalty for 2020 through 2023, and just recently announced they are again waiving it for 2024. As of now, they intend to enforce the penalty for missed 10-Year Rule RMDs starting in 2025.
Again, clear as mud, right???
Here are the RMD rules for Non-Designated Beneficiaries:
If the beneficiary of an IRA is something other than a living/breathing person (or a qualifying see through trust for a living/breathing person), the RMD rules are two-pronged.
If the original account owner died before they were required to start taking their own RMDs, the inherited account is subject to the “5-Year Rule,” which simply says the account must be fully distributed by the end of the fifth year after the year of death. For example, if the original account owned died in 2024, the inherited account will need to be fully distributed before December 31, 2029.
There are no annual RMDs under the 5-Year Rule; the account simply needs to be fully distributed before the end of the five-year period.
If, on the other hand, the original account owner was of an age where they were required to start their own RMDs, then the inherited IRA beneficiary must take annual RMDs using the original account owner’s age at the time they died, and the corresponding Single Life Expectancy Table life expectancy factor based on the original owner’s age. This method is often known as the “ghost life rule” method, and can result in annual RMDs that last longer than five years.
Some final notes before wrapping up:
All of the above rules are in reference to traditional pre-tax IRAs. The rules apply the same to inherited Roth IRAs with one notable difference; under the 10-Year Rule, there aren’t requirements to take any annual RMDs, even if the original account owner was of their own RMD age when they died.
Additionally, regarding minor children who are Eligible Designated Beneficiaries, or EDBs, they can “stretch” their annual RMDs until they reach age 21. At that point, they then fall under the 10-Year Rule, where the new 10 year period starts at that point; the person can no longer use the stretch RMD provisions.
Also, this summary didn’t address “successor” beneficiaries, which are beneficiaries of beneficiaries (e.g. John dies and leaves his IRA to Frank. Frank later dies and leaves the inherited IRA to Jane; Jane is the successor beneficiary). Successor beneficiaries fall under the 10-Year Rule.
One other thing to keep in mind is that if you’re over 70 ½ and are the beneficiary of an inherited IRA, you can do Qualified Charitable Distributions (“QCDs”) from the inherited IRA and the QCDs can take the place of any RMDs you might have from the account. So, if you’re charitably inclined and don’t really need the money from the inherited IRA, making QCDs can be a perfect solution.
As you can see, RMD rules for inherited IRA accounts are extremely convoluted. While I tried to make this write-up as thorough (and accurate!) as possible in explaining the rules, it may not cover every possible angle or scenario. As such, don’t rely on this as comprehensive analysis of inherited IRA RMDs.
Additionally, as always, this blog is not to be considered advice or recommendations for you or your specific circumstances. Consult with a qualified tax or financial professional in determining the proper RMD treatment for your inherited IRA.
For additional info on this topic, it may be helpful to refer to Charles Schwab’s summary of Inherited IRA Withdrawal Rules.