Inherited IRA Required Minimum Distribution Rules
Given that most people these days own an IRA, I often receive questions about these IRAs work after the death of the IRA owner. Here are some basic rules:
1) If you inherit an IRA from your spouse then you have a lot more options then if you didn’t. In most instances (under current tax laws) if you inherit an IRA from your spouse, you will probably roll your spouse’s IRA into your IRA (however this may not always be the best route, it just depends on your cirumstances).
2) If you inherit an IRA from anyone other than your spouse then you normally need to start taking money out of that IRA by December 31 of the year after the person died. Think about it. IRAs grow tax deferred while you are alive and taxes aren’t paid until you take the money out. If someone dies with money in their IRA the IRS stands to lose all the taxes they could have collected if the participant took the money out before they died. The term “Required Minimum Distributions” (“RMD”) is the IRS’s way of telling you that they want to tax you annually on at least a minimum amount of the IRA you have inherited (i.e. by December 31 of the year after death).
How much you need to take out depends on different factors (was the beneficiary designation form correctly filled out at the financial company? even if they didn’t fill it out properly you still have options after the death of the participant to try to fix it. If the forms were correctly completed then you probably can take distributions based on your life expectancy which is usually the best option. The worst case scenario is that you have to take it all out in 5 years which could cause a serious tax hit).
3) Whose tax rate do you use? Whoever receives the distribution puts it on their tax returns therefore you use their rate.
4) If you have inherited multiple IRAs from the same decedent, you may choose to combine life-expectancy distributions for those inherited IRAs and withdraw the total from one inherited IRA.However, you may not combine your RMD’s from your own traditional IRA with your inherited IRA. Basically, if you have 3 traditional IRAs where you are the owner and 3 IRAs that you inherited you can take all of your own IRA required minimum distributions from 1 of your own IRA accounts (if you so choose) and all of your Inherited IRA distributions from 1 of the IRA inherited accounts (again if you so choose). You can’t take your distributions from just 1 of the 6 accounts. Clear as mud? Don’t you love the IRS?
All of the above is not intended to be used as tax advice or constitute legal advice. The above are a description of general issues I see in my practice and is for informational purposes only. Consult your lawyer or CPA if you want specific advice regarding your situation.