Inherited IRAs – When do RMDs Begin?
We are frequently asked when required minimum distributions (RMDs) begin when an individual inherits an IRA. As with most things related to IRAs, the answer is, it depends.
Year of Death RMD
If a Traditional IRA owner died after their required beginning date (RBD) and did not take their RMD for the year, the RMD will need to be paid to the beneficiary by December 31 of the year of death. The RBD is April 1st of the year after turning age 70 ½.
Example: Matt’s date of birth is 1/1/1945. Matt turns 70 on 1/1/2015. He turns 70 ½ on 7/1/2015. His required beginning date is 4/1/2016. Matt dies on 8/1/2017, well after his RBD. His beneficiary will have to take his RMD for 2017 if Matt has not taken it before his death.
RMDs Begin in the Year after the Death of the IRA Owner
A beneficiary or qualifying trust that is named on the beneficiary form generally has the option of taking distributions over their own life expectancy. A qualifying trust can look through the trust to the age of the oldest beneficiary of the trust and the trust can take RMDs using that age. The age of the beneficiary is irrelevant. RMDs on the inherited IRA must begin in the year after the death of the IRA owner.
A beneficiary who inherits through the estate of an IRA owner who died after his RBD will also have an RMD beginning in the year after the death of the IRA owner. However, instead of being able to use their own life expectancy, they must use the remaining life expectancy of the deceased IRA owner. Only in the tax code can a person be dead and still have a life expectancy!
A Roth IRA beneficiary will have RMDs beginning in the year after the death of the Roth owner if the beneficiary is named on the beneficiary form.
RMDs can be Deferred until Age 70 ½
Yes, some RMDs for inherited IRAs can be deferred until age 70 ½. The beneficiary must be a spouse who was named on the beneficiary form. When the spouse is the sole beneficiary of the IRA and remains a beneficiary, there is no RMD from the inherited IRA until the year that the deceased spouse would have turned 70 ½.
Inherited Account must be Paid Out in 5 Years
This option only occurs a) when the IRA owner dies before his RBD and the beneficiary inherits through the estate, and b) when the IRA agreement mandates this payout.
There is no RMD for the first four years. In the fifth year, the RMD is the total account balance. The beneficiary can take out whatever amounts they wish in the first four years and empty the account in the fifth year. This strategy will minimize the tax effect in the fifth year.
Conclusion
As you can see, most IRA beneficiaries have an RMD beginning in the year after the IRA owner’s death. The beneficiaries with the most advantageous options are those that are named on the beneficiary form. Beneficiaries who inherit through the estate are penalized and some will end up having to empty their inherited IRA within five years.