Required Minimum Distributions from Inherited Retirement Accounts

Written by Jeffrey S. Gold, CPA LMC Tax Director

Last month, The Bottom Line discussed the general rules for required minimum distributions (RMDs) from retirement accounts.  In this article, we will discuss the more complex RMD rules that apply to retirement accounts that pass to a beneficiary after the death of the owner.

An inherited (or beneficiary) retirement account is one that is opened when someone inherits an IRA or employer-sponsored retirement account after the original owner’s death. A beneficiary can’t make additional contributions. The funds remain tax deferred and can either be withdrawn right away without penalty (although non-Roth accounts are subject to income tax) or kept in a tax-deferred IRA account belonging to the beneficiary.

Inherited Traditional IRA

Spousal Beneficiary: If the sole beneficiary is the spouse of the decedent, the account may simply be transferred to a new or existing IRA under the beneficiary’s own name. It becomes the beneficiary’s own IRA for all tax purposes, and all normal IRA rules apply.  For example, the assets continue to grow tax-deferred, withdrawals are subject to penalty if the beneficiary has not reached age 59½, and the spouse may designate a new beneficiary. If the decedent was age 73 or older, and thus had been required to start taking RMDs, the spouse must take an RMD for the year of death if the decedent had not already taken it.

Most spousal beneficiaries choose this spousal transfer, but there are other options for spouses. These include lump sum distribution, an inherited IRA with mandatory RMDs based on the spouse’s life expectancy starting the year the decedent would have been age 73 (life expectancy method), and (if the decedent died before age 73) a 10-year method that allows distributions for up to 10 years following the account holder’s death.

Beneficiaries Other than Spouses: The rules for non-spouse beneficiaries depend on whether they are classified as “eligible” designated beneficiaries, and whether the decedent died before or after he or she was required to begin RMDs (generally age 73). Eligible beneficiaries are minor children of the decedent, persons who are chronically ill or permanently disabled, and others who are less than 10 years younger than the decedent.

Regardless of whether the decedent had reached their RMD date, beneficiaries may take a lump-sum distribution instead of opening an inherited IRA. If the decedent died before their RMD date, an eligible beneficiary may choose to open an inherited IRA in his or her own name and take distributions over the life expectancy method or the 10-year method. Under the life expectancy method, the beneficiary must take annual RMDs (starting the year following the death) over the beneficiary’s life expectancy. Under the 10-year method, annual distributions are not required but all funds must be distributed by the tenth year following the decedent’s death.

If the eligible beneficiary is a minor child of the decedent, the life expectancy method is only available until the child turns 21 and then must be switched to the 10-year method starting from age 21 (the former lifetime “stretch” IRA for minor children has been eliminated). If the decedent died after their RMD date, the 10-year method is not available, and eligible beneficiaries must choose the life expectancy method or a lump-sum distribution.

Beneficiaries other than spouses or eligible designated beneficiaries must fully distribute the assets by the end of the tenth year after the account owner dies. If the account owner had reached their RMD date before they died, the non-eligible beneficiary must take annual RMDs during this period.

Inherited Roth account

Although a Roth account owner is not required to take RMDs during his or her lifetime, beneficiaries must generally begin taking distributions. The exception to the inherited Roth RMD rule is an account inherited by the decedent’s spouse. The spouse may choose to transfer the account to his or her own Roth IRA (existing or new), then treat it as if it had been their account originally (with no RMDs required). Spouses may alternatively elect life expectancy, 10-year, or lump sum distributions.

For non-spouse beneficiaries, inherited Roth accounts are subject to the same RMD requirements as inherited traditional accounts, as discussed above. Withdrawals of contributions from an inherited Roth are tax free. Most withdrawals of earnings from an inherited Roth IRA account are also tax-free but may be subject to income tax if the Roth account is less than 5 years old at the time of the withdrawal.

LMC is dedicated to staying updated on these developments and advising clients effectively. For more information or questions regarding Required Minimum Distributions, please reach out to your LMC professional.