10-Year RMD Rule for Inherited IRAs
If you have ever inherited an IRA or other tax-deferred retirement account, you may be familiar with the 10-year RMD rule. If you are a beneficiary but have not yet inherited a tax-deferred retirement account, you must familiarize yourself with this rule. Your relationship with the original account owner will impact the distribution rules you are subject to. Spouses who inherit an IRA have more flexibility than non-spouse beneficiaries regarding when withdrawals must be taken.
If you are a spouse beneficiary, You can treat the IRA as your own and designate yourself as the account owner. The spouse can also roll it over into their own pre-existing IRA. If you are a non-spouse beneficiary, all the money from the account must be withdrawn by December 31st, the 10th year after the original owner’s death. Since withdrawals are required, you won’t pay the 10% penalty if you’re under 59 ½. But you must pay income taxes on the distributions and eventually empty the account.
Some beneficiaries are exempted from the 10-year rule. This exemption includes:
- A surviving spouse.
- A disabled or chronically ill person.
- A child who hasn’t reached the age of majority.
- A person over ten years younger than the IRA account owner.
It is also important to note that the 10-year rule only applies to accounts inherited after 2019. There is more flexibility if a non-spouse beneficiary inherited the account in 2019 or prior. The non-spouse beneficiary would be allowed to withdraw over their lifetime expectancy instead of depleting the account within ten years. If the account owner died in 2020 or later, this is when the 10-year rule applies to non-spouse beneficiaries.
We recommend taking 1/10th of the account balance every year until you reach that ten-year mark. If you were to deplete the entire account balance in the first year, you would have a pretty large tax bill. By breaking up the tax liability over ten years, you minimize the taxes you must pay. If you don’t need this withdrawal for income every year, you can reinvest it into an after-tax account. Even though you must deplete the account, you can still keep that money invested for your retirement.
If you inherit a Roth IRA, it is entirely tax-free if the Roth IRA was held for at least five years, starting January 1st of the tax year for which the first Roth IRA contribution was made. If you receive distributions from the Roth IRA before the end of the five-year holding period, they are tax-free to the extent of the owner’s contributions. However, any earnings or interest on the contribution amount is taxable.
Overall, it is essential to remember this 10-year RMD rule when planning for retirement if you expect to inherit a tax-deferred retirement account. The SECURE Act requires the entire balance of the participant’s inherited IRA account to be distributed within ten years of the original owner’s death. Waiting until the end of year ten to withdraw the entire balance could bump you up tax brackets and cause you to pay more than you would have if you depleted the account over ten years.