The Zombie Rule

By Andy Ives, CFP®, AIF®
IRA Analyst

This article is NOT about the “ghost rule” applicable to non-living beneficiaries. That payout rule applies when a non-person beneficiary (like an estate) inherits an IRA when the original owner died on or after his required beginning date (RBD). With the ghost rule, a non-person beneficiary is allowed to use the single life expectancy of the deceased individual to determine annual required minimum distributions (RMDs). As such, the name “ghost rule” seems wholly appropriate. (I most recently wrote about the ghost rule in the Slott Report on February 7, 2024, “Ghost vs. 5-Year: The Calendar Dictates.”)

No, this is something different. Since we are approaching Halloween, I thought I’d write about a unique beneficiary payout rule available to living, breathing people…one that has yet to be named. I hereby deem the following beneficiary option as…the “Zombie Rule.”

We know that the SECURE Act created five classes of eligible designated beneficiaries (EDBs). These include surviving spouses; minor children of the account owner; disabled individuals; chronically ill individuals; and individuals not more than 10 years younger than the IRA owner. (Those older than the IRA owner also qualify.) These EDBs are still permitted to take annual stretch RMDs over their own single life expectancy.

Spouse beneficiaries will typically do a spousal rollover into their own IRA, so we will disregard that EDB class. As for the next three EDB classes, more often than not they will be younger than the IRA owner when they inherit. (Obviously that is the case with minor children.)

But that final class of EDBs – individuals not more than 10 years younger than the IRA owner – is interesting. ANY beneficiary who is OLDER than the deceased IRA owner qualifies as an EDB under this classification. As an older EDB, that living, breathing person can choose which single life expectancy to use for calculating annual RMDs – their own age, or that of the deceased individual. Since the living, breathing beneficiary can inhabit the deceased person’s single life expectancy space, we have the Zombie Rule!

Example:

Ichabod dies at age 75, which is after his RBD. Ichabod’s beneficiary is his older sister Salem, age 80. Since Salem is not more than 10 years younger than Ichabod (she is older), she qualifies as an EDB and can stretch RMD payments. Since Ichabod died AFTER his RBD and Salem is older than Ichabod, Salem is permitted to use Ichabod’s single life expectancy to calculate her RMDs. Ichabod’s life expectancy in the year OF his death is 14.8 for a 75-year-old. For subsequent years, Salem subtracts 1 each year (starting with 13.8 for her first RMD calculation). As such, the inherited IRA should last for 14 years until Salem is 94.

By leveraging the Zombie Rule, Salem can minimize her RMDs and extend the period for which she must take distributions, thereby spreading the total taxes due over a longer time horizon. (While 94 may seem old to be taking inherited IRA RMDs…that witch may live to be 300!)