Many federal employees and retirees have inherited IRAs over the years from relatives. Unlike individual traditional IRAs in which the traditional IRA owner must take required minimum distributions (RMDs) when the owner reaches his or her required beginning date (RBD, currently age 73), any individual who inherits a traditional IRA must begin taking RMDs from his or her inherited traditional IRA starting the year after the traditional IRA owner’s death. This column discusses pre-2020 and post-2019 RMD rules regarding inherited traditional IRAs.
Federal employees and retirees who inherited traditional IRAs from non-spouses (for example, a federal employee was named beneficiary of a deceased parent’s traditional IRA ) who died before January 1,2020 had different options as to how to withdraw their inherited traditional IRAs. They could withdraw the entire traditional IRA within five years of the IRA owner’s death. Or they can take annual RMDs from the inherited IRA each year based on the inherited IRA beneficiary’s life expectancy. Each year the RMD would be calculated using the end of the previous year’s inherited IRA balance and the beneficiary’s current year single life expectancy, as shown in IRS Single Life Expectancy Table (Table 1). A portion of Table 1 is presented here:
The following example illustrates:
Example 1. Steven, age 60 during 2025, inherited a traditional IRA from his father wo died in October 2018. Steven’s inherited traditional IRA balance as of December 31,2024 was $362,700. According to the IRS’ Single Life Expectancy table (Table 1), the life expectancy of a 60-year-old during 2025 is 27.1 years. Steven’s 2025 inherited traditional IRA RMD is calculated as follows:
$362,700/27.1 = $13,383.76
Steven has until December 31,2025 to withdraw his 2025 inherited traditional IRA RMD of $13,383.76.
SECURE Act (2019) and Inherited Traditional IRA RMD Rules
With the passage of the SECURE Act in December 2019, IRS rules regarding RMD rules from inherited IRAs changed. The rules for post-December 31,2019 inherited IRA RMDs depend on the type of beneficiary, namely: (1) Eligible designated beneficiaries (EDBs); (2) Non-eligible designated beneficiaries (NEDBs); and (3) Non-designated beneficiaries (NDBs). Each beneficiary category with respect to RMDs is discussed below:
• Eligible designated beneficiary (EDB). An EDB includes the following individuals: (1) A surviving spouse; (2) A minor child of the IRA owner. This is valid until the child becomes age 21; (3) An individual not more than 10 years younger or older than the IRA owner; (4) A chronically ill person; or (5) A disabled person under the strict tax code definition. An EDB has the option of stretching annual RMDs over his or her single life expectancy.
• Non-eligible designated beneficiaries (NEDBs). NEDBs are living beneficiaries who are not eligible designated beneficiaries. NEDBs are subject to the “10-year rule”. The “10-year rule” requires that an inherited traditional IRA be withdrawn in its entirety by December 31st of the tenth year following the death of the traditional IRA owner. Under the 2022 IRS proposed RMD regulations, the IRS stated that an NEDB who inherits a traditional IRA from a traditional IRA owner who died on or after his or her required beginning date (RBD), must also take RMDs during years one through nine of the 10-year period. The RBD depends on when the traditional IRA owner was born, as summarized in the following table.
Calculating Annual RMDs
The question then becomes: How do NEDBs who inherited traditional IRAs after December 31, 2019 calculate their annual RMDs during years one through nine following the year of death of the traditional IRA owner? The IRS has announced that the first RMD for NEDBs who inherited traditional IRAs after December 31,2019 is the prior year December 31 inherited IRA balance divided by the single life expectancy factor of the NEDB, under the IRS’ Single Life Expectancy Table.
The single life expectancy is based on the NEDB’s age in that first year, the year after the death of the traditional IRA owner. Annual RMDs for years two through nine are calculated by taking the prior year’s December 31 inherited IRA balance divided by the prior-year’s single life expectancy factor minus 1.0.
However, the RMD calculating is more challenging for those NEDBs who inherited traditional IRAs between 2020 and 2023. This is because the IRS waived annual RMDs within the 10-year period until January 1, 2025. Starting January 1,2025, NEDBs are required to take RMDs from their inherited traditional IRAs. Any waived RMDs for the years 2021 through 2024 did not have to be taken. The following example illustrates:
Example 2. Pauline inherited a traditional IRA from her mother Elizabeth who died in 2022 at age 83. In 2023, the year after Elizabeth’s death, Pauline was age 57. As an NEDB, Pauline is subject to the 10-year rule and must withdraw the entire inherited traditional IRA no later than December 31, 2032. Since Elizabeth died after reaching her RBD, Pauline must take annual RMDs for the years 2025 through 2031. Note that Pauline calculates her first inherited traditional RMD for 2025 and subsequent RMDs as follows:
Step 1: Determine Pauline’s baseline life expectancy factor when she was 57 – her age the year after her mother Elizabeth died. From the IRS Single Life Expectancy Factor Table, the life expectancy of a 57-year-old is 29.8 years. 29.8 less 2 (years) equals 27.8.
Step 2: Pauline finds out that the December 31,2024 inherited traditional IRA balance was $279,844.
Step 3: Divide Step 2 by Step 1:
$279,844/27.8 = $10,066.33
Pauline has until December 31,2025 to take her 2025 inherited traditional IRA RMD.
Note that the traditional IRA RMD is fully federal and state taxable.
NEDBS should note the following with respect to inherited IRAs:
1. The IRS’ waiver of 2021 – 2024 RMDs was welcome news to most traditional IRA NEDBs. However, the tax consequences of these waived RMDs may not be so welcomed. This is that because of the IRS waiver of 2021 through 2024 RMDs , many NEDBs will have a compressed period (between five and nine years) to withdraw their inherited traditional IRAs. Taking just the minimum of each year’s RMMD during each of the remaining years of the 10-year period could result in a large balloon payment at the end of year 10 and potentially cause a huge federal income tax and state income tax liability.
2. Inherited ROTH IRA NEDBs are not required to take annual RMDs. This is the case no matter when the Roth IRA owner died. As a result, Roth IRA NEDBs are encouraged to postpone withdrawal of their entire inherited Roth IRA until the end of year 10 following the year the Roth IRA owner died. The purpose of this postponement is to allow the inherited Roth IRA to grow over time tax-free to the maximum extent possible.
• Non-designated beneficiaries (NDBs). Who is an NDB? An NDB is a non-living entity such as an estate, a charity or a trust that do not meet the IRS’ “see-through” rules. RMDs for NDBs depend on whether the IRA owner died before, on or after his or her RBD (see above RBD table). If the IRA owner died with a traditional IRA before his or her RBD, or with a Roth IRA at any age, then the inherited IRA must be emptied by the end of the fifth year following the year of death. Annual RMDs are not required during the five-year period.
If the traditional IRA owner died on or after his or her RBD, then RMD payments ae made over the remaining single life expectancy of the deceased traditional IRA owner, as if the traditional owner had lived. This is often called the “ghost rule.”
The question becomes: How are “ghost rule” RMDs calculated? The first RMD, for the year following the year in which the IRA owner died, is based on the IRA owner’s life expectancy factor under the IRS’ Single Life Expectancy Table in the year of death, minus 1.0. The following example illustrates:
Example 3. Arthur died in 2024 at age 84 and left his IRA to his estate. Jerome, Arthur’s son is the sole estate beneficiary. Since the estate is an NDB and Arthur died after his reaching RBD, the “ghost rule” applies. The 2025 RMD, payable to Jerome through the estate in 2025 is calculated by taking the IRA balance as of December 31, 2024, divided by 7.7 (Arthur’s remaining single life expectancy from the Single Life Expectancy Table in the year of death – 8.7 for an 84-year-old – less 1.0 equals 7.7) must be taken no later than December 31, 2025.
The 2026 RMD will use the IRA balance as of December 31, 2025 divided by a recomputed life expectancy factor of 7.7 less 1.0 or 6.7.
Note that if a traditional IRA owner fails to name a beneficiary on the IRA beneficiary form, the default beneficiary is the estate. The result is that RMD payments may be made over a shorter period than would apply if an individual were named on the beneficiary form. This depends on the age of the beneficiary named. Payments may be made over a 10-year period.
It is also important that Roth IRA owners name a beneficiary for their Roth IRA accounts. When a Roth IRA owner dies without a designated beneficiary or names an NDB as beneficiary, then the five-year rule applies, regardless of how old the Roth IRA owner was at death. Naming a Roth IRA beneficiary allows the beneficiary to postpone the full withdrawal of the inherited Roth IRA until the end of the 10th year following the death of the Roth IRA owner. This will allow for potentially maximum tax-free growth over a 10-year period.