The Most Confusing Inherited IRA Questions, Answered

If the non-spouse eligible designated beneficiary inherits the IRA before the account holder reached their required beginning date for their RMD:

• They can open an inherited IRA and use the life expectancy method to take RMDs.
• They can open an inherited IRA and use the 10-year method.
• They can take a lump-sum distribution.
  

If the non-spouse eligible designated beneficiary inherits the IRA after the account holder has reached their required beginning date for RMDs:

• They can open an inherited IRA and distribute based on the life expectancy method. 
• They can open an inherited IRA and take RMDs based on their own life expectancy. However, the account must be emptied within 10 years. So any money left over after RMDs starting in 2025 must be withdrawn by the end of year 10.
• They can take a lump-sum distribution.

What Are the New RMD Options for Spousal Beneficiaries?

A change in the rules offer some flexibility to a spousal beneficiary in terms of when and how they take RMDs from the deceased spouse’s account. These rule changes can be particularly beneficial if the deceased spouse was younger than the surviving, beneficiary spouse.

These new rules allow the surviving spouse to use the Uniform Lifetime Table rather than the Single Life Table for calculating the RMDs from the deceased spouse’s IRA. The Uniform Lifetime Table generally results in a lower RMD amount.

Also, the surviving spouse can choose to wait until the deceased spouse would have reached the age for RMDs to begin taking RMDs from their account. If the deceased spouse is younger, this allows the surviving spouse to wait longer to take these RMDs.

Are Roth Inherited IRAs a Good Idea?

For those beneficiaries who are not spousal or eligible designated beneficiaries, a Roth inherited IRA will still be subject to the 10-year rule. But distributions will not be taxed as long as the account owner has satisfied the five-year rule before their death.

This can be an important planning tool for parents or other account owners. The account owner can do a Roth conversion, effectively paying the tax for their beneficiaries. As long as by the time of their death the account holder has satisfied the five-year rule for their Roth IRA account, the beneficiary will not have to pay taxes on their withdrawals over the 10-year period.

This can get tricky if the account owner is older, potentially not living the full five years to satisfy the five-year rule for the conversions. In the event that the five-year rule has not been satisfied all or in part, the amount that equates to contributions will not be taxable to the beneficiary but some or all of the amount attributable to earnings will be.

Must Beneficiaries Take Undistributed Year-of-Death RMDs?

Generally, the answer is yes.

In a case where the account holder dies before satisfying their RMDs in their year of death, if there are multiple beneficiaries, all that is required is that the total RMD amount be taken before year-end. It can be taken by all of the beneficiaries, one of the beneficiaries or any combination thereof.

In a situation where the account owner has multiple IRAs and dies before all RMDs are taken for the year, the answer is more complicated.

In a situation where the deceased account owner had more than one IRA account, beneficiary designation on the accounts differ in terms of names and the percentage of the account, and the RMD(s) for the year have not been fully satisfied, the distributions must be taken proportionally by each beneficiary from the decedent’s IRAs based on the prior year’s ending balance.

In some situations, a beneficiary may be able to get a waiver against any undistributed RMDs. For example, if the account holder died in December and the custodian was not able to process the information needed for the beneficiary to take the RMD in the account owner’s year of death, the beneficiaries can qualify for a waiver until Dec. 31 of the following tax year to take the RMD and have all penalties waived.