Learn About Inherited IRA Minimum Distributions

Understanding Inherited IRAs and the Basic Rules

An inherited IRA is a retirement account that you receive when the original account owner passes away. This could be a spouse, parent, grandparent, or other family member. The rules for inherited IRAs differ significantly from regular IRAs you might open yourself, and these differences affect how much money you must withdraw each year.

When you inherit an IRA, the account maintains its tax-deferred status, meaning the money inside continues to grow without being taxed until you withdraw it. However, federal law requires account owners and beneficiaries to take minimum distributions at certain times. These minimum distributions are called Required Minimum Distributions, or RMDs. The IRS uses the term "minimum" because you must withdraw at least this amount—you can always withdraw more if you want.

The amount you must withdraw depends on several factors: who you are in relation to the deceased person, your age, the value of the account, and when the original owner passed away. These rules changed significantly in 2020 with the SECURE Act and again in 2023 with the SECURE 2.0 Act. Understanding these changes matters because the rules that applied to inherited IRAs five years ago may not apply today.

Different types of accounts may have different rules. If you inherited a traditional IRA, the distribution rules differ from inheriting a Roth IRA. If you inherited a Simplified Employee Pension IRA (SEP-IRA) or a Savings Incentive Match Plan for Employees IRA (SIMPLE IRA), additional rules may apply. The good news is that the basic concepts remain similar across account types, though some specifics change.

Practical Takeaway: Write down what type of IRA you inherited and when the original owner passed away. These two facts determine which set of rules applies to your situation. Keep this information handy as you review the guidelines that follow.

How Minimum Distributions Are Calculated

The IRS calculates minimum distributions using a formula that divides the account balance by a life expectancy factor. This life expectancy factor comes from IRS tables that estimate how long people typically live based on their age. The result is the amount you must withdraw that year.

The calculation works like this: First, determine the balance of the inherited IRA on December 31st of the year before you take your first distribution. This is called the "valuation date." If the account holds multiple investments, use their total value. Next, find your life expectancy factor from the appropriate IRS table—either the Uniform Lifetime Table, the Single Life Expectancy Table, or the Joint Life and Last Survivor Expectancy Table. Then divide the account balance by this factor. The result is your minimum distribution for that year.

For example, imagine you inherited an IRA with a balance of $100,000 on December 31st. Your life expectancy factor according to the IRS table is 25.5. You would divide $100,000 by 25.5, which equals approximately $3,922. This means you must withdraw at least $3,922 that year. The next year, you recalculate using the new account balance and your new life expectancy factor.

The life expectancy factor decreases by one each year you live. This means your distribution amount typically increases over time, even if the account balance stays the same, because you are dividing by a smaller number. However, if the account loses value—for example, during a stock market decline—your minimum distribution may actually decrease because the starting balance is lower.

Your financial institution holding the inherited IRA should calculate this amount for you and send you a statement showing what you owe. However, you remain responsible for understanding whether the calculation is correct and taking the distribution on time. Some people hire tax professionals to review these calculations, especially if their situation is complex.

Practical Takeaway: Request a written statement from your IRA custodian that shows exactly how they calculated your minimum distribution for the current year. Review it to understand the account balance and life expectancy factor they used. If something seems unclear, ask them to explain it in writing.

Rules for Spouse Beneficiaries

If you are the spouse of the person who owned the IRA, you have more options than other beneficiaries. Spouse beneficiaries receive special treatment under tax law because spouses often inherit the bulk of an estate and need flexibility in managing these assets.

One major option available only to spouse beneficiaries is the "spousal rollover." This means you can treat the inherited IRA as your own IRA. If you do this, the money becomes part of your retirement savings, and you do not need to take distributions based on the original owner's age. Instead, you follow the normal rules for your own IRA. You do not need to start taking distributions until you reach age 73 (as of 2023; this age increases to 75 by 2033 under SECURE 2.0). This option can provide significant tax advantages if you are younger than the original owner or if you do not need the money right away.

Alternatively, spouse beneficiaries can keep the IRA in the deceased spouse's name and take distributions as a beneficiary. Under current law, spouse beneficiaries who do not do a spousal rollover must empty the inherited IRA within ten years after the death. This ten-year deadline applies regardless of your age. However, you do not need to take a specific amount each year during those ten years—you can take the money out gradually or all at once, as long as the account is completely emptied by the end of year ten.

The choice between a spousal rollover and remaining as a beneficiary requires careful thought. A spousal rollover makes sense if you are significantly younger than the deceased or if you do not need the money soon. Remaining as a beneficiary might make sense if you need to access the money during the ten-year period or if you want more control over the inherited assets. Tax professionals can help you weigh these options based on your specific circumstances.

Practical Takeaway: If you are a spouse beneficiary, obtain information from the IRA custodian about both the spousal rollover option and the beneficiary distribution option. Write down the ten-year deadline that applies if you choose to remain a beneficiary. Consider discussing these options with a tax professional before making your choice.

Rules for Non-Spouse Beneficiaries

If you inherited an IRA and you are not the spouse of the original owner, different rules apply to you. These rules changed significantly under the SECURE Act of 2019 and were further refined under SECURE 2.0. Understanding which version of the rules applies depends on when the original owner passed away and your relationship to that person.

Under the current rules, most non-spouse beneficiaries must empty the inherited IRA within ten years after the original owner's death. This is called the "ten-year rule." The key point is that you must completely empty the account by the end of the tenth year after death. However, the rules about how much you must withdraw each year—or even whether you must withdraw anything in years one through nine—depend on your age and other circumstances.

If you are a "designated beneficiary," you may need to take annual minimum distributions during the ten-year period. A designated beneficiary is a specific person named in the IRA documents, as opposed to an estate or a charity. If you are a designated beneficiary and you are younger than the original owner, you may have to take distributions each year based on your life expectancy, even while the account exists. After year ten, any remaining balance must be withdrawn.

However, if you are a designated beneficiary who is older than the original owner was when they passed, the rules are different. In some cases, you might not need to take annual distributions—you just need to empty the account within ten years. This means you could take nothing for nine years and then take all remaining money in year ten, though this strategy may not be tax-wise.

If you are a non-designated beneficiary, such as an estate or a charitable organization, you typically must empty the IRA within five years after the death. This is the "five-year rule," and it applies stricter requirements than the ten-year rule for designated beneficiaries.

The rules are complex because Congress created exceptions for certain categories of people. For example, disabled or chronically ill beneficiaries may qualify for different treatment. If you fall into a special category, the standard rules may not apply to you.

Practical Takeaway