3691 / What distribution requirements apply to an inherited IRA where the beneficiary is not the surviving spouse?

Editor’s Note: Under regulations finalized in 2024, designated beneficiaries are required to take annual RMDs throughout the ten-year distribution period if the original account owner died after the required beginning date (it was originally expected that the beneficiary could elect to deplete the entire account in year ten if desired). The final regulations will be effective prospectively, beginning in 2025.  Each year, the IRS has offered relief by excusing post-inheritance RMDs.  Most recently, Notice 2024-35 once again excused RMDs in 2024 for beneficiaries of accounts when the original owner died after their required beginning date and the beneficiary inherited the account in 2020, 2021, 2022 or 2023.

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Planning Point: Although RMDs for inherited IRA beneficiaries have technically been waived every year since 2020, these beneficiaries may wish to consider taking annual RMDs anyway.  Tax rates are currently at historic lows.  The IRS has also not indicated whether it will extend the 10-year period, meaning that the beneficiary could face a larger tax bill once the IRS begins enforcing their RMD obligations in 2025.

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Distribution requirements for an inherited IRA for a nonspouse beneficiary will depend on whether the IRA owner died before, on or after the required beginning date. The SECURE Act made substantial changes that eliminate the “life expectancy method” and “five-year method,” discussed under the heading below, for most account beneficiaries. Under the new law, most non-spouse account beneficiaries will be required to take distributions over a 10-year period following the original account owner’s death (the 10-year rule).

The law did not change the rules applicable to surviving spouses who inherit retirement accounts. Exceptions also exist for disabled beneficiaries, chronically ill beneficiaries and children who have not reached “the age of majority” (i.e., eligible designated beneficiaries).  Proposed regulations provide that, for defined contribution plans, a child reaches the age of majority on their 21st birthday. One exception contained in the proposed regulations would continue to allow plans adopted prior to the effective date of the final regulations to continue to use their own definition of “age of majority.”

A trust may be used to secure payments from the inherited account over the life expectancy of a disabled or chronically ill beneficiary. The new 10-year rule also does not apply to an account beneficiary who is not more than 10 years younger than the original account owner. See Q for more on eligible designated beneficiary status.

The new rule applies for tax years beginning after December 31, 2019 and applies to all defined contribution-type plans (the rules governing distributions from Roth IRAs were not changed).

Pre-SECURE Act Law: Death Before Required Beginning Date

Prior to 2020, if an IRA owner died before the required beginning date, distributions must be made under either a life expectancy method or the five-year rule ( Q 3688).¹ After-death distributions from a Roth IRA also will be determined under these rules because the Roth IRA owner is treated as having died before the required beginning date.²

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Planning Point: The CARES Act provided relief to IRA owners by eliminating the need to take 2020 RMDs. This relief also extends to beneficiaries of inherited accounts. For account beneficiaries subject to the five-year rule, the CARES Act provides that if 2020 is one of those five years, it is not counted—essentially extending the distribution period to six years.

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Under the life expectancy rule, if any portion of the interest was payable to, or for the benefit of, a designated beneficiary, that portion could be distributed over the life (or life expectancy) of the designated beneficiary, beginning within one year of the owner’s death.³ To the extent that the interest is payable to a nonspouse beneficiary, distributions had to begin by the end of the calendar year immediately following the calendar year in which the IRA owner died.⁴ The nonspouse beneficiary’s life expectancy for this purpose was measured as of the beneficiary’s birthday in the year following the year of the owner’s death. In subsequent years, this amount was reduced by one for each calendar year that has elapsed since the year of the owner’s death.⁵

A person who wishes to use the life expectancy method and failed to timely start distributions could make up the missed RMDs and pay the 50 percent penalty on the missed distributions.⁶

Under the five-year rule, the entire interest had to be distributed within five years after the death of the IRA owner (regardless of who or what entity receives the distribution).⁷ To satisfy this rule, the entire interest must be distributed by the end of the calendar year that contains the fifth anniversary of the date of the IRA owner’s death.⁸

Pre-SECURE Act Law: Death On or After Required Beginning Date

If the owner of an IRA dies on or after the date distributions have begun (i.e., generally the required beginning date), but before the entire interest in the IRA has been distributed, the entire remaining balance generally must be distributed at least as rapidly as under the method of distribution in effect as of the owner’s date of death ( Q 3689).⁹

If the IRA owner does not have a designated beneficiary as of the date on which the designated beneficiary is determined (i.e., September 30 of the year after death) the IRA owner’s interest is distributed over the remaining life expectancy, using the age of the owner in the calendar year of death, reduced by one for each calendar year that elapses thereafter.¹⁰

If the owner does have a designated beneficiary as of the determination date, the beneficiary’s interest is distributed over the longer of (1) the beneficiary’s life expectancy, calculated as described in Q 3688¹¹ or (2) the remaining life expectancy of the owner, determined using the age of the owner in the calendar year of his or her death, reduced by one for each calendar year that elapses thereafter.¹²

See Q 3690 for the treatment of an IRA that is inherited by a surviving spouse.