Calculating RMD For An Inherited IRA

If a loved one passes away and you are the beneficiary of their IRA, you might not know what you need to do next. The IRS has a lot of complicated rules about inherited IRAs, and you can be subject to large penalties if you don’t follow them.

While it’s always a good idea to get tax advice from an attorney or accountant, we’ve put together a handy guide to help you figure out what you need to do to stay on the IRS’s good side when calculating RMD an inherited IRA. That’s the “required minimum distribution,” and it can get confusing!

Note: The information here pertains to Charles Schwab, eTrade and Ameritrade IRAs …. or even an inherited self-directed IRA (SDIRA) … But, as always, you should check with someone on our team for the solution that will apply to you and your situation.  

What Is An IRA?

Let’s start from the beginning. An IRA, which is short for Individual Retirement Account, is a retirement savings account that is not provided by your employer. You open the account yourself and can contribute up to $6,000 a year of pre-tax income, or $7,000 a year if you’re 50 or older. Yes, that means you don’t get taxed on the money you invest in your IRA.

But since Uncle Sam is involved, of course you know there must be a catch. A traditional IRA allows you to make pre-tax contributions, but you will be subject to required minimum distributions after you turn 72, and any withdrawals you take will be taxed as ordinary income after age 59½. Since you’re skipping taxes now and paying them later, traditional IRAs are called “tax-deferred retirement accounts”.

Another type of popular retirement account, the Roth IRA, is NOT a tax-deferred account. With Roth IRAs, you pay your taxes up-front by investing post-tax dollars, so you aren’t subject to required minimum distributions later in life.

How Do Required Minimum Distributions Work?

While you can invest pre-tax funds in an IRA, you’ll eventually have to pay taxes on that income. For this reason, the IRS is going to start making you take money out of your account once you turn 72, so that they can tax you on your distributions. However, if you’re still working, you can get out of taking distributions until you retire.

These mandatory annual withdrawals are fittingly called required minimum distributions, or RMDs for short. Your RMD requirement is calculated based on your age and the amount of money in your account.

Before 2020, the RMD age for IRAs was 70½, but when the SECURE Act passed in 2019, they raised the age to 72. If you turned 70½ before January 1, 2020, you may be subject to RMDs. A tax advisor can tell you if you are required to take RMDs now or when you turn 72.

If you try to skip an RMD, you can receive a whopping 50% tax penalty from the IRS. However, you may be able to receive an RMD Penalty Waiver to avoid IRS penalties under certain circumstances.

Inheriting IRAs

Upon an IRA owner’s death, the remaining balance of the account will be inherited by their designated account beneficiary. The rules are different for spouse beneficiaries and non-spouse beneficiaries, so we’ll talk about them separately.

A quick note before we get into the nitty-gritty of calculating these things. These rules apply to BOTH traditional IRAs and Roth IRAs. While the original account owner was not required to take RMDs from their Roth IRAs, if you inherit a Roth IRA and transfer the assets into an Inherited Roth IRA, you will be required to take RMDs. However, as long as the funds have been invested in the Roth IRA for at least five years, your RMDs will not be taxed.

Spouse Beneficiaries

If you inherit an IRA from your spouse, you have three options:

  • Treat the IRA as your own by becoming the account owner.

  • Roll the inherited IRA balance into your own IRA.

  • Transfer the balance to an Inherited IRA.

If you decide to treat the IRA as your own or roll over the balance into your own IRA, you would simply follow the regular RMD rules for your IRA. If you choose to transfer the balance into an inherited IRA, your RMD amount will be based on your age and be recalculated each year.

Non-Spouse Beneficiaries

If you inherit an IRA from someone who is not a spouse, you cannot roll the inherited balance into your own IRA and must transfer the balance to an Inherited IRA. 

If The Original Account Owner Died Before January 1, 2020

If the original account owner died before January 1, 2020 and was younger than 70½, you have two options:

  • Deplete the account within five years.

  • Take RMDs over your lifetime.

However, if the original account owner was 70½ or older at the time of death, then you must receive RMDs over your lifetime.

If The Original Account Owner Died On January 1, 2020 Or Later

If the original account owner died on January 1, 2020, or later and you are not an eligible designated beneficiary, under the 10-year rule instituted by the SECURE Act, you must deplete the account within 10 years.

Eligible designated beneficiaries include:

  • The original account owner’s spouse.

  • The original account owner’s minor child.

  • A disabled or chronically ill person.

  • Any other person who is not more than 10 years younger than the original account owner.

Under the SECURE Act, eligible designated beneficiaries still have the option to take RMDs based on their life expectancy.

How To Calculate RMD For Inherited IRAs

RMDs for Inherited IRAs are calculated based on two factors:

  • The account balance as of December 31 of the previous year.

  • The life expectancy factor for your current age.

Your life expectancy factor will be recalculated each year based on the IRS Single Life Expectancy Table. This table provides a life expectancy factor based on your current age. The older you are, the lower your life expectancy factor will be.

Once you determine the life expectancy factor for your age, you can do the following calculation:

Account Balance ÷ Life Expectancy Factor = RMD

You can also use an online RMD calculator to determine annual RMDs for you. We’ve linked a few good ones below:

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