Inheriting an IRA or other retirement account can be a significant financial event, but it comes with its own set of rules, particularly concerning Required Minimum Distributions (RMDs). These rules dictate how quickly you must withdraw funds from the inherited account, and failing to comply can result in hefty penalties.
The Impact of the SECURE Act
The SECURE Act of 2019 (and further clarifications in SECURE Act 2.0) significantly changed RMD rules for most non-spouse beneficiaries. Prior to the SECURE Act, many non-spouse beneficiaries could "stretch" distributions over their own life expectancy. Now, for most, a 10-year rule applies, which can accelerate tax obligations.
Key Terms to Know
Required Minimum Distribution (RMD): The minimum amount you must withdraw from your retirement account each year once you reach a certain age or inherit the account.
Inherited IRA/Retirement Account: A retirement account (like a 401(k) or IRA) that has been passed down to a beneficiary after the original owner's death.
Required Beginning Date (RBD): The date by which the original owner of a retirement account must start taking their own RMDs. This is generally April 1 of the year following the year they turn 73 (or 72 if born between 1951-1959, or 70½ if born before July 1, 1949). Whether the owner died before or after their RBD is crucial for beneficiary RMDs.
Fair Market Value (FMV): The total value of the inherited account at the end of the previous year. This is the balance used to calculate the current year's RMD.
Types of Beneficiaries and Their RMD Rules
The rules for inherited IRAs depend heavily on the relationship between the deceased owner and the beneficiary, and whether the beneficiary is considered an "Eligible Designated Beneficiary."
1. Spouse Beneficiary
Spouses have the most flexibility. They generally have three main options:
Treat as Own IRA: The spouse can roll over the inherited funds into their own IRA or treat the inherited IRA as their own. This allows them to delay RMDs until they reach their own RBD.
Treat as Inherited IRA (Life Expectancy Rule): The spouse can keep the account as an inherited IRA and take RMDs based on their own life expectancy, starting the year after the original owner's death. This calculator focuses on this option for spouses.
10-Year Rule: A spouse can also choose to follow the 10-year rule, but this is less common due to the other more flexible options.
These beneficiaries are exempt from the strict 10-year rule and can generally stretch distributions over their own life expectancy. EDBs include:
The deceased owner's minor child (until they reach the age of majority, typically 21, after which the 10-year rule applies).
A disabled individual.
A chronically ill individual.
An individual who is not more than 10 years younger than the deceased owner.
For EDBs, RMDs are calculated using the beneficiary's life expectancy from the IRS Single Life Expectancy Table, starting the year after the owner's death.
3. Non-Eligible Designated Beneficiaries (NEDBs)
This category includes most other individual beneficiaries, such as adult children who are not disabled or chronically ill, siblings more than 10 years younger than the owner, or other non-spouse individuals. These beneficiaries are subject to the 10-year rule.
Owner Died BEFORE RBD: If the original owner died before their Required Beginning Date, the NEDB is generally not required to take annual RMDs for the first nine years. However, the entire balance of the inherited account must be distributed by December 31st of the 10th calendar year following the year of the owner's death.
Owner Died AFTER RBD: If the original owner died after their Required Beginning Date, the NEDB is required to take annual RMDs for years 1 through 9. These annual RMDs are based on the original owner's remaining life expectancy (as if the owner were still alive). Then, the entire remaining balance must be distributed by December 31st of the 10th calendar year following the year of the owner's death.
4. Non-Designated Beneficiaries
This category includes entities like estates, charities, or certain trusts. The rules for these beneficiaries are more complex and generally involve faster distribution periods (e.g., 5-year rule or based on the owner's remaining life expectancy at death, if applicable). This calculator does not cover these specific scenarios.
How to Use the Beneficiary RMD Calculator
Our calculator simplifies the process of estimating your beneficiary RMD:
Account Balance: Enter the Fair Market Value (FMV) of the inherited account as of December 31st of the previous year.
Beneficiary's Age: Input your age (the beneficiary's age) as of December 31st of the current year for which you are calculating the RMD.
Year Original Owner Died: Enter the calendar year in which the original account owner passed away.
Current Year: Enter the calendar year for which you want to calculate the RMD.
Beneficiary Type: Select your relationship to the deceased owner (Spouse, Eligible Designated Beneficiary, or Non-Eligible Designated Beneficiary).
Original Owner's Age at Death: If you select 'Non-Eligible Designated Beneficiary', you will need to provide the original owner's age at death. This is crucial for the 10-year rule when the owner died after their RBD.
Did Original Owner Die AFTER their Required Beginning Date (RBD)?: Check this box if the owner had already started taking their own RMDs or had passed their RBD. This impacts the 10-year rule for Non-Eligible Designated Beneficiaries.
Click "Calculate RMD" to see your estimated Required Minimum Distribution.
Example Scenarios:
Let's look at a few examples using the calculator:
Owner Died AFTER RBD: (Doesn't matter for year 10, full balance is due)
Result: RMD would be $100,000.00 (Entire balance must be distributed).
Important Considerations
Beneficiary RMD rules can be complex, and the information provided by this calculator is for educational purposes only. Always consider the following:
Tax Implications: RMDs are generally taxable income in the year they are received. Consult a tax professional to understand the impact on your specific tax situation.
Penalties: Failing to take your RMD by the deadline can result in a penalty of 25% (or 10% if corrected promptly) of the amount not distributed.
Professional Advice: It is highly recommended to consult with a qualified financial advisor or tax professional to discuss your specific inherited IRA situation and ensure compliance with all IRS regulations.