Inherited IRAs and Required Minimum Distributions (RMDs)

Prior to the Secure Act and Secure Act 2.0, beneficiaries of IRAs generally had the option to use the IRS uniform lifetime table to calculate and withdraw RMDs over their lifetime.  With the passing of the Secure Acts, there have been modifications to inherited IRAs and the required minimum distributions to go along with them. This article touches on the very basic changes.  

As part of the new regulations there are now essentially three classes of beneficiaries with varying rules pertaining to each:

1. Eligible designated beneficiaries (spouse or minor child of decedent, individual that are disabled or chronically ill, and individuals less than 10 years younger than the original account owner)

2. Non-eligible designated beneficiaries (most children and grandchildren)

3. Non-designated beneficiaries (an estate or some trusts)

The rules applied to RMDs for each class of beneficiaries also changes dependent on if the original owner of the IRA died on or after their required beginning date (RBD) or prior to their RBD. Currently, the RBD for a retirement account owner to begin withdrawing their RMDs is April 1 following the year they turn 73.

Surviving spouses have many options on how and when to receive distributions and usually can use the rule that fits their situation the best. Spouses are also generally the only beneficiaries that currently can rollover the inherited IRA to their own IRA.

Minor children are able to take distributions over their own life expectancy however, once they reach the age of majority, they will have 10 years where RMDs may be required.  Those that are disabled or  chronically ill and those that are less than 10 years younger than the original account holder may also stretch their account distributions over their own life expectancy.  

Non-eligible designated beneficiaries which many times consist of children and grandchildren who are more than 10 years younger than the owner will usually need to withdraw all of the funds within 10 years of the account owner’s death. The IRS has said they will issue final regulations in 2024 pertaining to RMDs during these 10 years.

If an estate is the beneficiary of an IRA and the original account owner was under the required beginning date to take distributions at the time of their death, the estate has 5 years before all of the funds must be withdrawn.

Because each beneficiary’s situation is different when inheriting an IRA, along with the recent ever-changing tax laws to coincide with them, taxpayers should take caution and consult with professionals to help navigate the best options for them that will also comply with the latest, updated regulations.