How Are Annual RMDs in the 10-Year Period Calculated?
By Ian Berger, JD
IRA Analyst
In the July 22, 2024 Slott Report, my colleague Sarah Brenner explained how the IRS, in its final SECURE Act required minimum distribution (RMD) regulations issued on July 18, did not budge on a controversial position it had taken in its 2022 proposed regulations. The issue is whether a retirement account beneficiary subject to the 10-year payout rule who inherits from an IRA owner after the owner had started RMDs must continue annual RMDs during the 10-year period. The IRS said yes. Sarah gave the following example:
Example: Karen inherited a traditional IRA from her mother Linda, who died at age 85 in 2020. Under the SECURE Act, Karen is subject to the 10-year rule. She must empty the inherited IRA account by December 31, 2030. The new IRS final regulations also require her to take annual RMDs based on her life expectancy in years one through nine of the 10-year payout period. Due to the IRS waiver of the penalties for missed RMDs in years 2021, 2022, 2023, and 2024, Karen does not need to take RMDs for those years. However, beginning in 2025 she must take an annual RMD for years 2025-2029 from the inherited IRA.
So, how are Karen’s annual RMDs for 2025-2029 calculated assuming she turned age 60 in 2020 (the year her mother Linda died)? Let’s start with the 2025 RMD. Karen turns 65 in 2025. You might think we would look at the current IRS Single Life Table, see that the life expectancy of a 65-year old is 22.9 and assume that Karen’s 2025 RMD is the 12/31/24 value of the inherited IRA divided by 22.9.
But that would be too easy. Instead, we must go back and figure out what Karen’s baseline life expectancy was in 2021 (the year following the year Linda died) when she was 61, and then subtract 1.0 for each subsequent year up to 2025. The life expectancy of a 61-year old under the current IRS Single Life Table is 26.2. Subtracting 1.0 for each subsequent year gets us to a 22.2-year life expectancy for Karen’s 2025 RMD. Karen’s 2026 RMD will be 21.2 (22.2 -1.0), her 2027 RMD will be 20.2 (21.2 – 1.0), and so on until 2030. In 2030, Karen must take out all of her remaining of the inherited IRA.
The IRS position requiring annual RMDs has been widely criticized. But keep in mind that many plan account beneficiaries subject to the 10-year rule will voluntarily take out more than the yearly minimum distribution over the 10-year period. For those people, the IRS rule is irrelevant. And, those who aren’t already taking out more than the annual RMD should consider doing so. If they don’t, they may be stuck with a large tax bill in the 10th year when the account must be emptied. That’s especially true for beneficiaries like Karen who, because of the delayed effective date of the annual RMD rule, will only be required to take five yearly RMDs instead of nine.