In the post-Secure Act environment, many individuals who have inherited retirement accounts have significant questions on how their ongoing required minimum distributions must now be calculated.
While most clients know that the life expectancy distribution option, or "stretch" IRA, has been unavailable for most account beneficiaries since the 2019 legislation became law, the life expectancy tables remain important for individuals calculating their annual RMDs.
The rules can become particularly confusing in situations where the account beneficiary has elected to skip RMDs in any situation where the Internal Revenue Service has offered relief from penalties for missed RMDs.
Without experienced advice, clients risk incurring a 25% penalty on any RMD shortfall amount. That significant penalty makes it important that taxpayers calculate their RMDs using the correct life expectancy factor for the year in question.
When Do Life Expectancy Tables Apply?
As a general matter, an inherited account beneficiary's RMD is calculated by dividing the account balance as of Dec. 31 of the previous year by the proper life expectancy factor. These life expectancy factors are based on age and are found in the IRS' Single Life Expectancy Table, which was updated in 2022 based on new mortality data.
Inherited account beneficiaries are required to use this life expectancy formula only if they are required to take RMDs. When non-eligible designated beneficiaries inherit an account, they are not required to use the formula if the original owner died before their required beginning date. Instead, they must empty the account within 10 years of the owner's death and can take distributions as they choose over that 10-year period.
If non-designated beneficiaries inherited the account before the Secure Act became law, they were subject to a five-year distribution period. Because the CARES Act waived distributions for 2020, some beneficiaries have until the end of 2024 to empty the account.
