Everyone we’re working with for a retirement plan has to keep an eye on the age of 72 because that’s when the required minimum distributions begin. While we all know money has to come out of our retirement accounts, it’s not as simple to understand all the requirements and then execute that efficiently. Today we’ll continue our deep dive with part two focused on the inherited account side of things.

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A Deep Dive Into RMDs – Inherited IRAs (Part 2)

Welcome back to the second part of our series on Required Minimum Distributions (RMDs) for Inherited IRAs. In the previous article, we explored the basics of RMDs and how they are calculated for traditional IRAs. In this article, we will focus on inherited IRAs and the specific rules and considerations that apply to them.

When an individual inherits an IRA, whether it’s from a spouse or a non-spouse, certain rules must be followed to ensure compliance with the tax code. Inherited IRAs have their own set of regulations, distinct from those that apply to the original account holder.

Spousal Inherited IRAs:

When a spouse inherits an IRA, they have the option to treat the account as their own. This means that they can choose to either leave the funds in the inherited IRA or roll them into their own IRA. If they decide to treat the inherited IRA as their own, they can delay taking RMDs until they reach the required age of 72 (previously 70½). However, if the spouse is younger than the deceased account holder, they can choose to use their age for RMD calculations, which may result in smaller distribution amounts.

Non-Spousal Inherited IRAs:

For non-spousal beneficiaries of an inherited IRA, the options and rules vary depending on whether the original account holder died before or after their required beginning date, which is April 1st of the year following the year they turned 72 (previously 70½).

If the account holder passed away before their required beginning date, the beneficiary can choose the stretch option. This allows them to take RMDs based on their own life expectancy, recalculated each year, which can greatly extend the tax-deferred growth of the inherited IRA.

If the account holder died after their required beginning date, non-spousal beneficiaries generally have two options. The first option is to deplete the inherited IRA within ten years. This restriction was newly introduced in 2020 with the passage of the SECURE Act. The second option is to use the previous life expectancy method, which would allow the beneficiary to continue taking RMDs calculated based on their life expectancy.

It’s important to note that the ten-year rule does not require distributions to be taken annually. Beneficiaries have the flexibility to withdraw the funds at their convenience throughout the ten-year period, as long as the account is empty by the end of the tenth year.

Inherited Roth IRAs:

The rules for inherited Roth IRAs generally follow the same guidelines as inherited traditional IRAs. However, distributions from an inherited Roth IRA are generally tax-free, as the original contributions were made with after-tax dollars.

Spouses inheriting a Roth IRA have the option to convert the inherited account into their own Roth IRA. This potentially allows for continued tax-free growth and avoids the need for RMDs during the spouse’s lifetime.

Non-spousal beneficiaries of inherited Roth IRAs also have the opportunity to convert the account into an Inherited Roth IRA. By doing this, they can continue the tax-free growth and avoid RMDs throughout their lifetime. However, like traditional IRAs, inherited Roth IRAs are subject to the ten-year distribution rule if the original account holder passed away after their required beginning date.

In conclusion, understanding the rules and options for RMDs with regards to inherited IRAs is crucial for individuals who have inherited these accounts. Spousal beneficiaries have different choices compared to non-spousal beneficiaries, and certain rules may apply depending on whether the IRA is a traditional or Roth IRA. It is always recommended to consult with a financial advisor or tax professional to ensure compliance with the ever-changing tax laws.