If you've inherited an IRA, you are likely subject to required minimum distributions (RMDs), and you'll face steep penalties for getting these wrong. Read on for a breakdown of the RMD rules for inherited IRAs.
Inherited IRA RMD rules
Like most things involving tax law, it's tough to dive into the details without clarifying a few definitions first. The table below explains some must-know terms about IRA RMDs for an account you've inherited.
| Term | What It Means |
|---|---|
| Eligible designated beneficiary | Eligible designated beneficiaries include the account owner's surviving spouse or minor child, a disabled or chronically ill individual, or any other person who's not more than 10 years younger than the original account owner. |
| Required beginning date (RBD) | The RBD is the date the original account owner would have had to start taking RMDs. For account owners born after June 30, 1949, the RBD is April 1 of the year after the account owner turns 72. For everyone else, the RBD is April 1 after the account owner is (or would have been) 70 1/2. |
| Five-year rule | Under the five-year rule, the account must be depleted on December 31 in the year containing the fifth anniversary of the account owner's death. |
| 10-year rule | Under the 10-year rule, the inherited account must be depleted on December 31 in the year containing the 10th anniversary of the account owner's death. |
Data source: IRS.
You'll see the relevance of these terms in the next table, which details the RMD rules for spouses, eligible designated beneficiaries, and non-eligible designated beneficiaries who have inherited a traditional IRA.
Surviving Spouses
Spouse may become account owner. Normal RMD rules apply based on spouse's age. Early withdrawals are subject to a 10% penalty. Or, spouse may take life expectancy payments based on his or her age. No 10% penalty applies at any time. If the account owner died on or after the RBD, RMDs start the year following the account owner's death.
Otherwise, the spouse may be able to delay RMDs until the RBD.
Non-spousal Eligible Designated Beneficiaries
Beneficiary can take life expectancy payments starting the year after the account owner dies.
If the IRA owner died before 2020 and before the RBD, the beneficiary can withdraw all funds under the five-year rule. If the account owner died after 2019 and before the RBD, the beneficiary can withdraw all funds under the 10-year rule.
Non-eligible Designated Beneficiaries (Adult Children, Other Relatives, etc.)
If the IRA owner died before 2020, the beneficiary can withdraw all funds under the five-year rule. Alternatively, the beneficiary could take life expectancy payments starting the year after the account owner died. If the account owner died after 2019, the beneficiary must withdraw all funds under the 10-year rule.
Data source: IRS.
Calculating RMD life expectancy payments
To calculate RMD life expectancy payments, you have to know about IRS life expectancy tables. The IRS uses three life expectancy tables for various RMD situations, but the one that applies to inherited IRAs is called Table I (Single Life Expectancy). You can find it in Appendix B of IRS Publication 590-B.
To calculate RMDs, use Table I to find the appropriate life expectancy factor. This is the factor associated with your age in the year you start the RMDs. Divide that factor into the account balance as of the end of the prior year. The result is the amount you must withdraw from the account by the following April 1.
In subsequent years, the calculation is the same, but the factor will change. If you are a surviving spouse, you'd continue using the life expectancy factor associated with your age. If you are a non-spouse beneficiary who's eligible for life expectancy payments, you'd reduce the life expectancy factor in each year by 1.
Inherited Roth IRA rules
The rules governing RMDs are simpler for inherited Roth IRAs, partly because Roths don't have RBDs. Most Roth IRA beneficiaries must take a lump sum distribution under the five-year rule or the 10-year rule, depending on when the account owner died.
Surviving spouses can take the lump sum option, but they also have two other choices. They can move the inherited Roth assets into their own name or take life expectancy payments based on their age.
CARES Act
The CARES Act made one notable change to RMD rules: The legislation waived all RMD requirements for 2020. If you had already elected to withdraw the inherited funds under the five-year rule, 2020 does not count. For example, say your loved one died on Dec. 1, 2019. Before the CARES Act, you'd have to withdraw those funds by Dec. 31, 2024. Under the CARES Act, you can skip over 2020, which makes the new deadline Dec. 31, 2025.
The legislation only waived RMDs for 2020. RMDs are mandatory in both 2021 and 2022.
Related Retirement Topics
If you miss an RMD from an inherited IRA
The penalty for missing an RMD from your inherited IRA is steep. Specifically, it's 50% of the difference between the distribution amount required and what you actually withdrew. You can request a waiver on IRS Form 5329, but you'll need a good reason for the oversight. An illness, death of a loved one, a major household disruption caused by a move or natural disaster could be reasonable explanations.
There is one alternative if the RMD you missed was a life expectancy payment, but you are eligible for a lump sum distribution. You could change your distribution strategy and withdraw all funds under the five-year rule without penalty. That may not make sense financially, though, so check with a tax advisor first.
