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Inherited IRA Rules: 7 Crucial Facts for Beneficiaries

AInvestFriday, Nov 8, 2024 10:29 pm ET
2min read

Inheriting an Individual Retirement Account (IRA) comes with its own set of rules and requirements, especially when it comes to Required Minimum Distributions (RMDs). As a beneficiary, understanding these rules is crucial to avoid potential penalties and maximize your retirement savings. Here are seven key facts you should know about inherited IRA rules.
1. **RMDs Apply to Most Beneficiaries** RMDs apply to most beneficiaries, including spouses, non-spouse individuals, and entities like estates or charities. You must take distributions from the inherited IRA according to specific rules, which depend on your relationship to the deceased account owner and the date of their death.
2. ** SECURE Act Changes for 2020 and Later** The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in 2019, changed the RMD rules for beneficiaries who inherit IRAs in 2020 or later. Non-spouse beneficiaries now have to withdraw all funds within ten years, with some exceptions for "eligible designated beneficiaries" like minor children, disabled individuals, or those less than ten years younger than the account owner.
3. **RMDs Based on Owner's or Beneficiary's Age** Beneficiaries must calculate RMDs based on their age or the owner's age at death. The IRS uses the younger of the two ages to determine the life expectancy factor. For multiple beneficiaries, the oldest age is used. RMDs are reduced by 1 for each subsequent year.
4. **Owner's RMD for the Year of Death** Beneficiaries can take the owner's RMD for the year of death if the owner had not yet taken it before their passing. This is known as the "owner's RMD" and must be taken by the beneficiary by the end of the year following the owner's death.
5. **Spouse Beneficiary Options** Spouses have more flexibility when it comes to RMDs. They can treat the inherited IRA as their own, take distributions based on their own life expectancy, or roll over the account into their own IRA. If the owner died before their required beginning date, the spouse can also follow the 5-year rule or keep the account as an inherited IRA.
6. **Non-Spouse Beneficiary Options** Non-spouse beneficiaries have different RMD rules depending on the owner's death date relative to their required beginning date. If the owner died before their RBD, non-spouse beneficiaries can take distributions based on their own life expectancy or follow the 5-year rule. If the owner died after their RBD, non-spouse beneficiaries must follow the 10-year rule, emptying the account by the end of the 10th year after the owner's death.
7. **Penalties for Failing to Take RMDs** Failing to take required minimum distributions can result in a 25% penalty on the amount not withdrawn. However, this penalty can be reduced to 10% if the missed distribution is taken within a correction window, which typically ends on the last day of the second taxable year after the penalty is imposed.

Understanding these inherited IRA rules is essential for beneficiaries to navigate the complexities of RMDs and avoid potential penalties. Consulting with a financial advisor or tax professional can help you make informed decisions about your inherited IRA and ensure you're following the appropriate RMD rules.

By familiarizing yourself with these seven crucial facts, you'll be better equipped to manage your inherited IRA and maximize your retirement savings.
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