If you have inherited a traditional Individual Retirement Account (IRA) and the original account holder had already started taking Required Minimum Distributions (RMDs) before passing away, you may need to withdraw a certain amount of funds annually in the following 10 years. By the end of the 10th year, you must completely empty the account.
Before the final regulations were determined, the Internal Revenue Service (IRS) had waived penalties for missed RMD withdrawals between 2021 and 2024. That grace period has now ended, and starting from the 2025 tax year, the rules will be fully enforced.
If you missed your 2025 RMD, you could face penalties equivalent to 25% of the amount that should have been withdrawn unless you take corrective actions promptly.
The SECURE Act passed in 2019 eliminated the “Stretch IRA” for most non-spouse beneficiaries. Under the old rules, beneficiaries could stretch out distributions from inherited IRAs over a longer period based on their life expectancy. This option, however, no longer exists for most current inheritors.
If you are a Non-Eligible Designated Beneficiary (NEDB), the “10-Year Rule” likely applies to you. NEDBs generally include adult children and other non-spouse inheritors.
To avoid the 10-Year Rule, you must meet one of the following exemptions:
– The deceased’s surviving spouse;
– The deceased’s minor children (whether adult or not at the 10th year, the rule applies);
– A beneficiary with a chronic illness or disability;
– A beneficiary who is within 10 years of age compared to the deceased account holder (e.g., siblings or close friends of similar age).
If you don’t meet any of the exemptions mentioned above, then the 10-Year Rule is likely the framework you must follow.
The outcome depends on whether the original IRA account holder passed away before or after their Required Beginning Date (RBD). The RBD is typically the April 1st of the year after the account holder turns 72.
– If the original account holder passed away before the RBD (before starting RMDs): No annual distributions are required, and the account must be emptied by the end of the 10th year.
– If the original account holder passed away on or after the RBD (already taking RMDs): Annual distributions are generally required, and the account must be emptied by the end of the 10th year.
If your parents were taking RMDs at the time of their passing, you must withdraw annually from the 1st to the 10th year. You cannot skip years and take all at once in the 10th year.
The 10-Year period starts counting from the year following the original account holder’s death.
For instance, if you inherited an IRA in 2022, you must withdraw the entire account balance by December 31, 2032.
The annual withdrawal amount is not a fixed percentage. Your yearly RMD is calculated based on the following factors:
– The account balance as of December 31 of the previous year;
– The Life Expectancy Factor corresponding to the Single Life Expectancy Table in IRS Publication 590-B.
Calculation formula:
Account balance at the end of the previous year ÷ Life Expectancy Factor = RMD for the current year
Your Life Expectancy Factor is determined by your age on December 31 of the withdrawal year. As you age, the Life Expectancy Factor changes, requiring you to recalculate your RMD annually based on the latest factors and your account balance from the previous year-end.
Your IRA custodian can typically calculate your RMD amount for you. It’s advisable to have a professional tax advisor verify the calculation, especially for the first withdrawal, to ensure accuracy.
The penalty for missed RMD withdrawals is 25% of the amount due. If you make up for the missed withdrawals within the two-year correction period and file Form 5329, the penalty can be reduced to 10%.
If you missed your 2025 withdrawals, take the following steps:
– Catch up on the missed withdrawals immediately. Withdraw the full amount due for 2025 as soon as possible.
– File Form 5329. This form reports additional tax on qualified retirement plans. You can attach it to your tax return or submit it separately.
– Apply for penalty relief if eligible. If it’s your first missed RMD and you have a valid reason, the IRS may waive the penalty. Provide a written explanation along with Form 5329 to justify the missed withdrawals.
Don’t risk waiting to see if the penalty will be waived; take action promptly.
What’s the difference between a Qualified Designated Beneficiary and a Non-Qualified Designated Beneficiary?
Qualified Designated Beneficiaries include spouses, deceased minors, individuals with disabilities or chronic illnesses, and beneficiaries within 10 years of the original account holder’s age. These individuals can take distributions over their life expectancy without following the 10-Year Rule.
Non-Qualified Designated Beneficiaries, on the other hand, must adhere to the 10-Year Rule. Most adult children inheriting traditional IRAs from their parents fall into the NEDB category.
Can I wait until the 10th year to take a lump-sum distribution?
This depends on the timing of the original account holder’s passing. If the account holder passed away before the RBD and had not started RMDs, you are not required to make annual withdrawals and can take the entire balance in the 10th year. However, if RMDs had already started before their passing, you must withdraw the specified amounts annually throughout the 10-year period.
Even if you take a lump sum in the 10th year, any penalties from missed withdrawals in previous years cannot be avoided in this scenario.
How can I obtain the Life Expectancy Factor for RMD calculations?
You can find the Life Expectancy Factor corresponding to your age in the Single Life Expectancy Table in IRS Publication 590-B. Divide the account balance as of December 31 of the previous year by this factor to calculate your RMD. Your IRA custodian can also assist in determining your RMD. It’s recommended to verify the calculation results, especially for the initial RMD withdrawal, to ensure accuracy.