Over the years, those federal employees and retirees who were the beneficiaries of inherited individual retirement arrangements (IRAs) have always faced a complex and challenging set of rules with respect to the calculation of required minimum distributions (RMDs) for their inherited IRAs.
Also known as a beneficiary IRA, an inherited IRA is an individually owned account that holds the assets from a deceased individual’s IRA. Inherited IRAs can be funded from any IRA, including traditional, Roth, SIMPLE and SEP-IRAs. An inherited IRA can also be created out of funds from a deceased’s qualified retirement plan such as a 401(k) or 403(b) retirement plan, or the Thrift Savings Plan (TSP).
This column summarizes the RMD rules that beneficiaries of inherited IRAs. Unless otherwise stated, the inherited IRAs discussed are traditional IRAs and not Roth IRAs. The provisions of the SECURE Act 1.0 (passed into law in December 2019), the CARES Act (passed into law in March 2020) and the SECURE Act 2.0 (passed into law in December 2022) and related IRS rules and relief provisions have created more confusion about which inherited IRA beneficiaries are subject to RMDs during 2023 and how much of an RMD they need to withdraw.
How Beneficiary IRA RMDs Are Determined
The factors that affect the distribution requirements for inherited IRAs include:
• Whether the original IRA owner died before January 1,2020 or after December 31,2019 when the SECURE Act 1.0 passage made changes to the RMD rules for beneficiaries. The distribution rules are different depending on whether the IRA owner died before January 1,2020 or after December 31, 2019.
• The relationship of the IRA beneficiary to the original IRA owner and certain characteristics; namely, is the beneficiary a spouse, minor child, disabled or chronically ill individual, or an entity other than an individual.
• Whether the original IRA owner died before or after his or her required beginning date (RBD), the first date the original IRA owner was required to begin taking IRA RMDs.
The spouse of the original IRA owner has more options than non-spousal beneficiaries if the spouse is the only IRA beneficiary. Determination of whether the spouse is the only beneficiary must be made by September 30th of the year following the year of the original IRA owner’s death.
In the year of a traditional IRA owner’s death, if the traditional owner was past his or her required beginning date (RBD) (the age which the original traditional IRA owner was required to start taking RMDs), then the only RMD due is the amount the IRA owner was required to withdraw but did not withdraw before his or her death. Beginning the year following the IRA owner’s death, the RMD depends on certain features of the designated beneficiary and the distribution option chosen by the beneficiary.
Before discussing the specific rules for RMDs of beneficiary (inherited) traditional IRAs, it is important to present some definitions:
1. 5-year rule: If an IRA beneficiary is subject to the 5-year rule:
• They must empty the inherited account by the end of the 5th year following the year of the original IRA owner’s death
• 2020 does not count when determining the 5 years (a result of the CARES Act), and
• No withdrawals are required before the end of the 5th year.
2. 10-year rule: If a beneficiary is subject to the 10-year rule:
• Empty the entire account by the end of the 10th year following the year of the original IRA account owner’s (or eligible designated beneficiary’s) death
• Relief under IRS Notice 2022-53 for IRA beneficiaries subject to the 10-year rule:
• The IRS will not treat a beneficiary of an inherited IRA who was subject to the 10-year rule and who failed to take an RMD for 2021 and 2022 as having failed to take the correct RMD and therefore no IRS penalty for failing to take an RMD will be imposed.
3. Eligible designated beneficiary
• Spouse or minor child of the deceased original IRA account owner
• Disabled or chronically ill individual, or
• Individual who is not more than 10 years younger than the original IRA owner.
4. Designated beneficiary
• Any individual designated as the beneficiary of a traditional IRA
5. Required beginning date (RBD)
• The first date the original traditional IRA account owner is required to begin taking RMDs
Death of the IRA Account Owner Occurred Before 2020
Spousal IRA Beneficiary Options
If the death of the traditional IRA owner occurred prior to his or her RBD, then the spousal beneficiary’s options are:
• Keep the inherited account, taking distributions based on the surviving spouse’s own life expectancy or follow the “5-year rule”, and withdraw the entire IRA within five years of the original IRA owner’s death, or
• Rollover the IRA into their own traditional IRA.
If the death of the spousal IRA owner occurred after his or her RBD, then the spousal beneficiary’s options are:
• Take distributions based on the surviving spouse’s own life expectancy
• There is no five-year rule available.
Non-Spouse IRA Beneficiary Options – Death of Original IRA Owner Occurred Before January 1, 2020
If the original IRA owner’s death occurred before his or her RBD, then the non-spouse IRA beneficiary’s options are:
• Take distributions based on their own life expectancy, the first of which must occur during the year following the year of death, or
• Follow the “5-year rule”.
If a traditional IRA owner’s death occurred after his or her RBD, then the non-spouse IRA beneficiary may:
• Take distributions based on the longer of their own life expectancy or the deceased traditional IRA owner’s remaining life expectancy.
A summary of the rules regarding the RMD rules for beneficiaries of IRA owners who died before January 1,2020 therefore comes down to three questions:
1. Did the original IRA owner name beneficiaries?
2. Was a spouse named as the only IRA beneficiary?
3. Did the IRA owner die before or after his or her RBD? Note that for IRA owners who were born before July 1, 1949, the RBD is April 1st following the year the IRA owner became age 70.5. Under SECURE Act 1.0, for IRA owners born after June 30,1949, the RBD is April 1st following the year the IRA owner becomes age 72. Under SECURE Act 2.0, for IRA owners born after December 31,1950 and before January 1,1958, the RBD is April 1st following the year the IRA owner becomes age 73. For IRA owners born after December 31,1957, the RBD is April 1st following the year the IRA owner becomes age 75.
Death of the Original IRA Owner After December 31, 2019
SECURE Act 1.0 was passed into law in December 2019 and became law on January 1,2020. With the SECURE Act 1.0 passage came changes to the IRA beneficiary RMD rules.
Spousal IRA Beneficiary Options
If the IRA owner’s death occurred prior to his or her RBD, then the spousal beneficiary may:
• Keep the traditional IRA as an inherited IRA account
• Delay beginning distributions until the deceased spouse (the original IRA owner) would have turned age 72, 73, or 75 (age depends on when the deceased spouse was born)
• Take distributions based on spousal beneficiary own life expectancy, or
• Follow the “10-year rule”; that is, withdrawing the entire account within 10 years following the year of death of the deceased spouse. •Rollover the account into the spousal beneficiary’s own traditional IRA
If the IRA owner’s death occurred after his or her RBD, then the spousal beneficiary may keep the account as an inherited account and either:
• Take distributions based on his or her own life expectancy, or
• Rollover the account into their own traditional IRA.
Non-Spouse IRA Beneficiary Options – Death of the Original IRA Owner After December 31, 2019
Starting January 1,2020, options for a beneficiary who inherits an IRA and who is not the spouse of the deceased traditional IRA owner depend on whether the beneficiary is an “eligible designated beneficiary” (EDB). An EDB is a: (1) Minor child of the deceased traditional IRA owner; (2) Disabled or chronically ill individual; or (3) Individual who is not more than 10 years younger than the IRA owner.
An EDB may:
• Take distributions over the longer of their own life expectancy and the deceased original IRA owner’s remaining life expectancy, if the IRA owner died after his or her RBD, or
• Follow the “10-year rule”, if the IRA owner died before his or her RBD.
If the designated beneficiary is not an EDB, then the designated beneficiary must follow the “10-year rule”. If the designated beneficiary is not an individual, then the rules discussed above when the original IRA owner died before January 1,2020, must be followed. This is because the SECURE Act 1.0 changes apply only to beneficiaries who are individuals.
A summary of the rules regarding the RMD rules for beneficiaries of IRA owners who died after December 31,2019 comes down to three questions:
1. Did the original IRA owner name IRA beneficiaries?
2. Was a spouse named as the only IRA beneficiary?
3. If a non-spouse was named as an IRA beneficiary, is the named spouse an EDB?
4. Did the IRA owner die before or after his or her RBD? Note that for IRA owners who were born before July 1, 1949, the RBD is April 1st following the year the IRA owner became age 70.5. Under SECURE Act 1.0, for IRA owners born after June 30,1949 the RBD is April 1st following the year the IRA owner becomes age 72. Under SECURE Act 2.0, for IRA owners born after December 31,1950 and before January 1,1958, the RBD is April 1st following the year the IRA owner becomes age 73. For IRA owners born after December 31,1957, the RBD is April 1st following the year the IRA owner becomes age 75.
Inherited Roth IRAs
In general, inherited Roth IRA accounts are subject to the same RMD requirements as inherited traditional IRA accounts. The difference is that withdrawals of contributions from inherited Roth IRAs are always tax-free. Most withdrawals of earnings from an inherited Roth IRA account are also tax-free. However, withdrawals of earnings may be subject to income tax if the Roth account is less than five years old at the time of the withdrawal.
Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER®, Chartered Life Underwriter, Chartered Financial Consultant, Registered Health Underwriter and Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019