Inherited IRA RMD
IRA owner passed away at age 72, would have been 73 in the following year. Is the beneficiary subjected to an RMD each year for 10 years/until the account is depleted?
IRA owner passed away at age 72, would have been 73 in the following year. Is the beneficiary subjected to an RMD each year for 10 years/until the account is depleted?
Permalink Submitted by Alan - IRA critic on Thu, 2024-08-29 14:32
No annual RMDs if the beneficiary is a 10 year rule beneficiary because the IRA owner passed prior to RBD. However, if the beneficiary was an EDB, annual RMDs would apply instead of the 10 year rule.
Permalink Submitted by Rene Grey on Thu, 2024-08-29 14:41
Thank you, that’s how I understood it. Fidelity’s website seems to have a different take. Maybe the rule is different for an inherited 401k that’s rolled to an inherited IRA?
https://www.fidelity.com/learning-center/smart-money/inherited-401k-rules
Roll over funds into an inherited IRA
Non spouse beneficiaries can also do a direct trustee-to-trustee transfer of inherited 401(k) funds into an inherited IRA, following rules similar to inheriting someone’s IRAOpens in a new window. The IRS waives any early withdrawal penalties for owners of inherited IRAs so they can withdraw at any time.
Some rules about this option: First, the non spouse beneficiary can’t make additional contributions to an inherited IRA. Second, unlike a spouse beneficiary who has a more flexible schedule to empty an inherited IRA, certain non spouse beneficiaries will need to withdraw all funds in an inherited IRA opened after January 1, 2020, no later than 10 years after the original account owner’s death. IRS regulations require RMDs during the 10-year period to be taken at least as often as they would have been taken under the original owner’s remaining life expectancy, (as opposed to inheriting before RMDs commenced, which would allow not withdrawing any money in years 1–9, then draining the account all in one go in year 10.) Thus, if the owner was age 73 or would have reached age 73 during the 10-year period, the beneficiary must take RMDs accordingly within the 9 years and take the final distribution in the 10th year.
Permalink Submitted by Alan - IRA critic on Thu, 2024-08-29 15:29
The bolded sentence copied from Fidelity is incorrect. The IRS “at least as rapidly rule” applies only to RMDs when the owner passes on or after the RBD date. To be clear, if the owner reaches 73 in 2024, the RBD date is 4/1/2025. If that owner passes prior to 4/1/2025 (prior to RBD) there were no RMDs required as of the date of death. With no RMDs required from the owner, non spouse beneficiaries under the 10 year rule would not have to take any RMDs in years 1-9. The fact that the owner would have been required to take RMDs if they lived past 4/1/2025 is irrelevant because their passing eliminated the RMD requirement for them.
It should also be noted that if the IRA owner took a distribution in 2024, that would have been applied as a 2024 RMD. But even though they took an RMD, if they passed prior to 4/1/2025 (the actual RBD), they passed prior to RBD and are not treated as having started RMDs with respect to the beneficiary. It’s all based on the RBD date relative to the DOD.
There was also a misleading statement regarding the date an inherited IRA was opened. It does not matter when the inherited IRA was opened, the RMD rules are based on the DOD. So if an owner passed in 2019, but the beneficiary did not open an inherited IRA until 2020 or later, the beneficiary is still treated as a pre Secure Act beneficiary.
So IRA custodians, as well as the IRS currently maintain web pages that are incorrect, or obsolete relative to the final IRS Secure Act Regs, that were just released last month.