What's an RMD?
The IRS requires that most owners of IRAs withdraw part of their tax-deferred savings each year, starting at age 73* or after inheriting any IRA account for certain individual beneficiaries. That withdrawal is known as a required minimum distribution (RMD).
RMDs are designed to ensure that investments in IRAs don't grow tax-deferred forever and this carries over to the beneficiary of the IRA. The rules for how IRA beneficiaries must take RMDs will depend on when the account owner passed away.
The account owner's required beginning date (RBD)
IRA owners generally must take their first RMD by April 1 of the year after they reach age 73*; that date is called their required beginning date (RBD).
*Due to changes to federal law that took effect on January 1, 2023, the age at which you must begin taking RMDs differs depending on when you were born. If you reached age 72 on or before December 31, 2022, you were already required to take your RMD and must continue satisfying that requirement.However, if you had not yet reached age 72 by December 31, 2022, you must take your first RMD from your traditional IRA by April 1 of the year after you reached age 73.
Inherited RMD calculation methods
The date of death of the original IRA owner and the type of beneficiary will determine what distribution method to use. You must take an RMD for the year of the IRA owner's death if the owner had an RMD obligation that wasn't satisfied.
For an inherited IRA received from a decedent who passed away after December 31, 2019:
Generally, a designated beneficiary is required to liquidate the account by the end of the 10th year following the year of death of the IRA owner (this is known as the 10-year rule). An RMD may be required in years 1-9 when the decedent had already begun taking RMDs.There are exceptions for certain eligible designated beneficiaries, defined by the IRS, as someone who is either:
- The IRA owners' spouse.
- The IRA owner's minor child.**
- An individual who is not more than 10 years younger than the IRA owner.
- Disabled (as defined by the IRS).
- Chronically ill (as defined by the IRS).
**Once a minor child reaches the age of majority, they'll become subject to the 10-year rule.
Generally, an eligible designated beneficiary may use the lifetime distribution rules that were in effect prior to 2020 and are specified in the "For an inherited IRA received from a decedent who passed away before January 1, 2020" section below.
We can help you calculate the RMD on an inherited IRA using the online Inherited RMD Calculator.
For more information, see IRS Publication 590-B, Distributions from Individual Retirement Arrangements (available at irs.gov).
Note:If the 10-year rule is being used for your inherited account, you should consult your tax advisor if you have any questions about taking distributions in accordance with this rule. A non-designated beneficiary (e.g., a non-individual such as an estate or charity) would generally be subject to the 5-year rule if the account owner died before they were required to begin taking RMDs (April 1st of the year following the year in which the owner reached RMD age). If the IRA owner passed away on or after April 1st of the year following the year in which the owner reached RMD age, the non-designated beneficiary would be subject to an RMD based on the original IRA owner's life expectancy factor. Special rules apply for certain types of trusts.
For an inherited IRA received from a decedent who passed away before January 1, 2020:
When a beneficiary becomes entitled to an IRA from an account owner who died before he or she was required to begin taking RMDs (April 1st of the year following the year in which the owner reached RMD age), the beneficiary can choose one of two methods of distribution: over their lifetime or within five years (the "five-year rule").
Lifetime distribution
Spouse as sole primary beneficiary.If the owner's spouse chooses to take the IRA as a beneficiary rather than assume the account, they can choose when to begin taking RMDs on the basis of their own life expectancy. The spouse must begin taking RMDs by the later of December 31 of the year after the owner's death or December 31 of the year the owner would have reached RMD age. The spousal beneficiary should not enroll in our RMD Service until the year they intend to begin taking RMDs. If the owner's spouse chooses to assume the IRA, they must begin taking RMDs by the later of December 31 of the year after the owner's death or April 1 of the year after the spouse reaches RMD age.
Non-spouse and when spouse is not sole primary beneficiary.An individual non-spouse beneficiary must begin taking RMDs on the basis of their own life expectancy by December 31 of the year after the owner's death. Multiple beneficiaries can take RMDs on the basis of their own life expectancies if all of the beneficiaries have established separate accounts by December 31 of the year after the owner's death and starting in that year. If all multiple beneficiaries have not established separate accounts by that December 31 date, all beneficiaries must take RMDs on the basis of the oldest beneficiary's life expectancy starting in the year after the owner's death.
Five-year rule
Any individual beneficiary may elect to distribute the inherited IRA assets over the five years following the owner's death. The distribution must be completed by the end of the year containing the fifth anniversary of the owner's death. Any non-individual beneficiary (except for a qualified trust) must use the five-year rule if the owner died before beginning to take RMDs.
Note:Vanguard's RMD Service doesn't accommodate accounts that are being distributed according to the five-year rule. If you've elected, or are required, to use the five-year rule for your inherited account, you should consult your tax advisor if you have any questions about taking distributions in accordance with this rule.
Roth IRAs & RMDs
Roth IRA owners don't need to take RMDs during their lifetimes, but beneficiaries who inherit Roth IRAs must take RMDs.
If you're inheriting a Roth IRA, your RMD would be calculated as outlined above.
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As someone deeply immersed in financial planning and retirement strategies, I'm well-versed in the intricacies of Required Minimum Distributions (RMDs). RMDs are a crucial aspect of retirement accounts, particularly IRAs, mandated by the IRS to ensure tax-deferred savings are withdrawn annually once an individual reaches a certain age, typically 72 or 73 depending on birthdate and recent legislative changes.
The purpose behind RMDs is to prevent tax-deferred investments from growing indefinitely and to extend this obligation to beneficiaries inheriting IRAs. The specifics of RMDs hinge on factors like the Required Beginning Date (RBD), which is the deadline for the first RMD, usually April 1st following the year one turns 72 or 73.
Regarding inherited IRAs, the calculation and distribution methods vary based on the original owner's date of death and the beneficiary type. For instance, the 10-year rule mandates that most beneficiaries must liquidate the account within ten years of the IRA owner's death, with exceptions for eligible designated beneficiaries like spouses, minor children, individuals close in age to the IRA owner, disabled individuals, and the chronically ill.
There are also distinctions for inherited IRAs received before and after January 1, 2020, regarding distribution methods: lifetime distributions or the five-year rule.
Furthermore, while Roth IRA owners aren't subjected to RMDs during their lifetimes, beneficiaries inheriting Roth IRAs must take RMDs.
To navigate this complex terrain, the IRS provides guidelines in Publication 590-B, and for more personalized assistance, individuals can consult tax advisors or utilize tools like the Inherited RMD Calculator.
In essence, RMDs are a critical aspect of retirement planning, ensuring tax obligations and distributions are managed effectively during retirement and for beneficiaries inheriting these accounts. For those inheriting IRAs, understanding the distribution rules and their implications is key to making informed financial decisions.
