Calculating Required Minimum Distributions for Inherited IRAs

In chapter 6 of Inheriting Your Spouse's IRA, author Bill Harris explains RMDs and how to calculate them.
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We’ve talked a little about the consequences if you chose plans without knowing how they will affect your future. If you follow the typical modus operandi, most likely, you will avoid Required Minimum Distributions (RMDs) until you reach age 72. However, you will want to understand what you are avoiding and why you want to avoid it.

William Harris

William Harris, RMA, CFP

As a reminder, an RMD is a minimum amount that must be withdrawn from a retirement account each year under certain circumstances.

  • Traditional IRA owners are subject to RMDs beginning in the year in which they turn age 72.

The Required Beginning Date (RBD) is the date by which the first RMD must be taken by an IRA owner. For the first RMD, the deadline date is always April 1 of the year following the year the owner reaches 72.

RMD Due Date

Note that the RMD is technically due by December 31, beginning in the year in which the IRA owner reaches age 72. However, IRA owners get some reprieve and can wait until April 1 of the following year to withdraw the RMD. While waiting until that April 1 date is allowed, it may not be the best decision. It means two RMDs will be due in one year: the initial one in April and the second one in December of the same year. Two RMDs means having to report more income and pay more income taxes.

For example:

Smith has just turned 72, so his first RMD is due by December 31 of this year.

However, he can delay taking it until April 1 of next year. Smith decides to delay.

As a result, next year, he will owe two RMDs. One needs to be withdrawn by April 1, and the other by December 31.

There is always the option that Smith can opt to take them earlier than the deadlines.

Note: On two occasions, in the Great Recession of 2009 and the Corona Virus Pandemic of 2020, the IRS eliminated any and all RMDs for those years.

Calculating RMDs for a Sole Spouse Beneficiary

If the IRA owner dies before the RBD (at age 72), a sole spouse beneficiary may:

  • Complete a spousal rollover or treat it as her own IRA. These are essentially the same thing. She would then calculate RMDs based on her own age.
  • Set up an inherited IRA. Keeping in mind that because of special spousal rules, RMDs will not start until her deceased spouse would have turned 72.

Calculating RMDs for Eligible Designated Beneficiaries

As noted earlier, the SECURE Act created a new type of retirement account beneficiary, known as an eligible designated beneficiary (EDB).

This group name is new, but the rules that apply are not. While tricky and complicated, the rules are the same as those that are applied to designated beneficiaries before the SECURE Act.

Eligible designated beneficiaries can “stretch” distributions from inherited IRAs indefinitely, beginning in the year after the death of the IRA owner, and calculate the RMD using the IRS’s Single Life Expectancy table.

To these beneficiaries, it is as though the SECURE Act never existed. In short, if you are a non-spouse EDB and you inherit an IRA, you don’t get to wait until age 72 before you need to start taking RMDs. You must start to take RMDs beginning in the year after the death of the account owner.

In addition to a spouse, other EDBs can be any of the following:

  • A disabled individual. An individual is considered “disabled” if they meet the strict rules outlined by IRC Section 72(m)(7). It is a restrictive definition of disability.
  • A chronically ill individual. Again, it is a restrictive definition. An individual will generally be considered “chronically ill” if they are unable to perform at least two of the six activities of daily living (ADLs). The six activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.
  • Certain trusts created for the exclusive benefit of disabled or chronically ill beneficiaries.
  • An individual who is not more than ten years younger than the decedent.
  • A minor child of the decedent. Minor children only enjoy that beneficiary status until they reach the age of majority. Upon reaching such age, the child becomes a non-eligible designated beneficiary, and the 10-year rule is now applied.

Here is an example of how the beneficiary status of a minor will evolve over time:

Joanne dies. She had her nine-year-old daughter Nicole listed as her only beneficiary. Under the guidance of a guardian, Nicole must generally begin taking RMDs beginning the following year (the year after the year of Joanne’s death), at which time Nicole will be ten. She will take distributions every year based on the Single Life Expectancy Table from age ten until she reaches the age of majority (most likely 18).

At that time, she will no longer qualify as a minor child of the decedent, so the rule about non-eligible designated beneficiaries applies.

The 10-year rule will kick in, requiring any remaining funds in the inherited IRA to be wholly distributed within ten years. During her ages of ten through 18, an RMD must be completed every year. From ages 18 through 28, no RMDs are required until a final distribution, which is required in the tenth year.

Nicole can take as much or as little as she wants in those years. She will pay income tax on any distribution. A final required distribution in year ten is equal to the total remaining account balance.

If Nicole fails to drain the account at the end of year ten, it results in a 50% tax penalty on the entire account balance.

Calculating RMDs for Non-Spouse Designated Beneficiaries

Unless you are an eligible designated beneficiary (such as a spouse beneficiary), non-eligible designated beneficiaries of traditional IRAs and/or Roth IRAs are subject to the 10-year rule. Under the 10-year rule, the entire IRA balance must be distributed to the beneficiaries by the end of the tenth year after the death of the IRA owner.

No distributions are required for years one through nine after the owner’s death. The beneficiaries can take as much or as little as they want in those years, on which they will pay income tax.

There is, however, a final required distribution in year ten, which is the total remaining account balance. Failure to drain the account at the end of year ten will result in a 50% tax penalty on the entire account balance.

Special Note: The same rules apply to Roth IRAs even though those distributions will be tax-free.

Calculating RMDs for Non-Designated Beneficiaries

A non-designated beneficiary is an entity, including an estate, charity, or certain trusts, for whom a life expectancy cannot be determined.

This distinction will determine how the assets in the IRA will be paid out. The following rules will apply:

If an IRA goes to a non-designated beneficiary, the entire IRA balance must be distributed by the end of the fifth year after the death of the IRA owner. No distributions are required for years one through four after the owner’s death.

However, those beneficiaries can take as much or as little as they want in those years, on which they will pay tax.

There is, however, a final required distribution in year five, which is the total remaining account balance. Failure to drain the account at the end of year five will result in a 50% tax penalty on the entire remaining account balance.

The Exception

As previously mentioned, an exception exists for a spouse who is the sole beneficiary of an entire estate and who has complete control over the assets. The IRS has consistently ruled that, under those circumstances, a spouse beneficiary can direct payment of the IRA funds to the estate. She can then direct the distribution of those funds out of the estate to her personal bank account and do a rollover of the funds to an IRA titled in her own name.

This is a huge tactical planning opportunity, most likely for someone who didn’t plan. Upon completion of a transaction like this, it is as if the funds had been in the surviving spouse’s IRA all along. A spouse has 60 days from the date of the estate receiving the distribution to complete the rollover. However, this option is not available if the spouse has done another IRA-to-IRA or Roth IRA-to-Roth IRA rollover in the last 365 days.

Since 2015, IRS regulations allow for only one rollover from one IRA to another IRA in any 12-month period, regardless of how many IRAs you own. The limit will apply by aggregating all of an individual’s IRAs (including SEP, SIMPLE, traditional, and Roth IRAs), effectively treating them as one IRA for purposes of the limit. It is a 12-month period from any rollover and not the calendar year. For example, if a spouse executes a rollover in April, she cannot do another rollover until April of the following year.

IRS Life Expectancy Tables

The IRS publishes three different life expectancy tables, two of which are relevant to spousal beneficiaries:

  • The Single Life Expectancy Table
  • The Uniform Lifetime Table.

Note: One important detail when calculating RMDs: don’t use the wrong life expectancy table!

Single Life Versus Uniform Life

A spouse beneficiary who establishes an inherited IRA will only use the IRS’s Single Life Expectancy Table. However, a spouse beneficiary who rolls the assets from the IRA she inherits into her own IRA will use the more favorable Uniform Lifetime Table to calculate RMDs. The expectancy factor from the Single Life Expectancy Table is smaller than that from the Uniform Lifetime Table for the same age. When you divide a fixed sum by a smaller factor, the resulting required distribution will be larger.

If you establish an inherited IRA, you potentially will have to take a larger distribution, which increases the amount of income tax that must be paid. When going to either table, the deceased spouse would have been 72 or older, or the surviving spouse is 72 or older. Prior to those ages, RMDs would not be mandated.

How to Use Life Expectancy Tables

The two life expectancy tables that are relevant for spousal beneficiaries are the Single Life Expectancy Table and the Uniform Lifetime Table. Those tables are used somewhat differently.

Harris Ch 6 - 1
Harris Ch 6 - 2

To use the Single Life Expectancy Table for inherited IRAs:

You will use this table if you are the spouse beneficiary who set up an inherited IRA and whose deceased spouse would have been age 72 or older.

  • Determine your balance as of December 31 of the previous year.
  • Locate your age on the IRS Single Life Expectancy Table.
  • Find the “life expectancy factor” that corresponds to your age.
  • Divide your retirement account balance by your current life expectancy factor.
  • The result is the RMD you must withdraw.
  • Repeat the same process each year.

As a Spouse Beneficiary Who Established an Inherited IRA

On the following page (below) is an example of how to determine your RMD using the Single Life Expectancy Table.

Single Life Expectancy Table

Harris Ch 6 - 3

Note: The IRS has proposed new RMD Life Expectancy Tables to begin in 2021. This will be the first update to the tables since 2002. Therefore, these charts will change.

Step One: Let’s assume your IRA balance on December 31 of the previous year was $100,000, and your deceased spouse was 75.

Note: if the deceased spouse was younger than 72, there’s no Required Minimum Distribution due at this time.

Step Two: Let’s say your age is 69. In the table, you will see that your life expectancy factor is 17.8.

Step Three: Divide your IRA balance of $100,000 by your life expectancy factor of 17.8. $100,000 divided by 17.8 = $5,617.98. The RMD for the year would be $5,617.98.

Step Four: Next year, you will look at age 70 (your factor would be 17.0).

Exceptional Use of the Single Life Expectancy Table:

An earlier section described a new category under the SECURE Act called eligible designated beneficiaries (EDBs). While this does not apply in the case of a spouse, other EDBs only use the Single Life Expectancy Table once to determine the first expectancy factor for their inherited IRAs.

After that, instead of identifying a new factor from the table each year, they reduce the factor they used the previous year by 1.

For example, if you are an EDB who inherited an IRA when you were 57 years old, you would use the 27.9 factor for the first year of RMDs. The following year, rather than using the factor listed for someone aged 58 (that is, 27.0), you’d subtract 1 from your original factor of 27.9 and get 26.9. This is the number by which you’d divide your account balance for the second year.

Harris Ch 6 - 4

You will use this table if you are the spouse beneficiary who did a spousal rollover, essentially making your spouse’s IRA your own.

  • Determine your balance as of December 31 of the previous year.
  • Locate your age on the IRS Uniform Lifetime Table.
  • Find the “life expectancy factor” that corresponds to your age.
  • Divide your retirement account balance by your current life expectancy factor.
  • The result is the RMD that you must withdraw.
  • Repeat the same process each year.

As a spouse beneficiary who rolled over the funds from her deceased spouse’s IRA into her own IRA.

Here’s a step-by-step example of how to determine the RMD using the Uniform Lifetime Table below.

Uniform Lifetime Table

Harris Ch 6 - 5

Note: The IRS has proposed new RMD Life Expectancy Tables to begin in 2021. This will be the first update to the tables since 2002. Therefore, these charts will change.

Step One: Are you a spouse below age 72? If yes, then there is no Required Minimum Distribution (RMD).

Step Two: If you are a spouse over age 72, let’s assume your IRA balance on December 31 of the previous year was $100,000.

Step Three: Let’s say your age is 73. In the table, you will see that your life expectancy factor is 24.7.

Step Four: Divide your IRA balance of $100,000 by your life expectancy factor of 24.7. $100,000 divided by 24.7 = $4,048.58. The RMD for the year would be $4,048.58, and this amount must be withdrawn from the IRA by December 31.

Step Five: Next year, use the life expectancy factor for age 74 (23.8) and calculate the same way.

The above article originally appeared as a chapter in Inheriting Your Spouse's IRA and is reprinted with permission from the author Bill Harris, RMA®, CFP®. No parts of this article may be reproduced without correct attribution to the author of this book.

You can find the full book here.