One Beneficiary, Three IRAs, Three Different Payout Rules

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport

An advisor called and said his 75-year-old client had just passed away. He had questions about the payout rules applicable to the three IRAs the client left behind: a traditional IRA, a Roth IRA, and an inherited IRA from his sister. I asked who the beneficiaries were. When the advisor said everything had been left to “the estate,” I told him to hang on to his hat – the ride was about to get bumpy. We discussed the different IRAs, one at a time…

Inherited IRA. Since this was already an inherited IRA, and the estate was the next-in-line beneficiary, that made the estate a “successor” beneficiary. Under the SECURE Act, a successor beneficiary gets the 10-year rule. It does not matter who the successor is or if they could otherwise qualify as an eligible designated beneficiary (EDB). If the successor is a spouse or disabled or a minor child or, as was the case here, the estate, the successor gets the 10-year rule.

Additionally, under IRS proposed regulations, since RMDs (required minimum distributions) were being taken on the inherited IRA, the estate (as successor) must continue with those exact same payments, using the exact same single life expectancy factor (minus one each year) that the original beneficiary was using. The successor essentially “steps into the shoes” of the first beneficiary for RMD purposes in years 1 – 9, but has the added layer of also having to empty the account by the end of year 10. An estate-owned inherited IRA is established, and the 10-year rule is applied.

Traditional IRA. The 75-year-old gentleman died after his required beginning date (RBD – now generally April 1 of year after the year a person turns 73). Thus, he was taking lifetime RMDs from his traditional IRA. Since he died after his RBD with a non-designated beneficiary (“NDB” – or what I call a “non-person” beneficiary – his estate), the “ghost rule” applies. The ghost rule dictates the IRA is to be paid out over the single life expectancy of the deceased individual.

For the ghost rule, we use the client’s age in the year of death. (This is different than normal beneficiary age calculations where we use the beneficiary’s age in the year after the year of death.) As a 75-year-old, the corresponding single life expectancy factor is 14.8. Since RMDs from this second estate-owned inherited IRA would start in the year after the year of death, we subtract one and begin with a 13.8 factor next year, in 2024. This factor is then reduced by one in subsequent years. (Note the anomaly where the ghost rule, in this situation, has created a payout window that is longer than the 10-year period.)

Roth IRA. Roth IRAs do not have lifetime RMDs. Therefore, Roth IRA owners are always deemed to die before the required beginning date. This is true even if the Roth IRA owner is 100 – death is always before the RBD. For IRA owners who die before the RBD with a non-person (NDB) beneficiary, like an estate, the 5-year rule applies. There are no annual RMDs during the 5-year window. A third estate-owned inherited IRA is established, and the account must be emptied by the end of the fifth year after the year of death.

Owning a traditional IRA, Roth IRA and inherited IRA is commonplace. Naming your estate, while discouraged, is also not unusual. However, when we overlay the IRA payout rules applicable to each situation, things risk spinning out of control.

Owning a traditional IRA, Roth IRA and inherited IRA is commonplace. Naming your estate, while discouraged, is also not unusual. However, when we overlay the IRA payout rules applicable to each situation, things risk spinning out of control.