Final Regulations for Inherited IRAs (Part 2)

In the last post, we addressed the final regulations for inherited IRA required minimum distributions (RMD) for Non-Eligible and Non-Designated beneficiaries that go into effect in 2025. In this post, we address the same topic, but for Eligible beneficiaries.

What is a Required Minimum Distribution?

As the name suggests, RMDs are minimum amounts that you are required to annually distribute from your tax deferred retirement accounts (401(k), 403(b), IRA, SIMPLE IRA, etc.) beginning the year in which you turn 73 (75 for people born after 12/31/1959).

If you are a beneficiary who inherits a retirement account, you are also be subject to RMDs regardless of your age. There are different rules depending on your relation to the deceased, so it is important to know how the IRS classifies this relation.

The Three Beneficiary Classifications

1. Eligible Designated Beneficiary
   • Spouse of the deceased.
   • Minor child of the deceased (younger than 21),
   • Chronically ill or disabled person,
   • Person not more than 10 years younger than the deceased.
2. Non-Eligible Designated Beneficiaries (See Part 1)
   • Any person who does not meet the qualifications of (1) above.
3. Non-Designated Beneficiaries (See Part 1)
   • Any non-person such as certain trusts, charitable organizations, or situations when no beneficiary is named.

When do I have to start taking Required Minimum Distributions?

Surviving spouses have the greatest flexibility as Eligible Designated Beneficiaries. A surviving spouse can treat the original account owner’s retirement account as their own. This is called a Spousal Rollover. In this situation, RMDs will not be required until the surviving spouse turns 73 (75 if born after 12/31/1959).

Alternatively, surviving spouses can treat the original account owner’s retirement account as an inherited account. This option allows the surviving spouse to delay RMDs until the point when the original account owner would have turned 73 (or 75). If the original account owner was already taking RMDs when they passed, RMDs for the spouse treating the account as an inherited account begin the year following the year of death.

To further complicate distribution rules, when treating the account as an inherited account, surviving spouses can utilize the “Spousal Option.” This election simply changes the underlying IRS Life Expectancy tables when calculating RMDs.

Non-Spouse Eligible Designated Beneficiaries are required to begin taking RMDs in the year following the year the original account owner passes. These RMDs are based on the beneficiary’s life expectancy and are typically small portions of the inherited account. At such a point when the Eligible Designated Beneficiary becomes a Non-Eligible Designated Beneficiary (e.g. a child of the original account owner turns 21), they become subject to the 10-year rule as discussed in Part 1.

Failing to take an RMD can incur penalties of up to 25% on top of the related income taxes, so it’s worth handling with diligence.

How do I calculate the Required Minimum Distribution?

1. Identify the balance of relevant IRA account(s) as of December 31st of the prior year.
2. Determine the Life Expectancy Factor using the appropriate IRS Lifetime Table.
   • The age and IRS Life Table to utilize change based on the type of beneficiary.
3. Divide the result of step 1 by the result of step 2.

This figure will change annually as the result of step 1 and 2 change. It is also applicable only in years where RMDs are required (recall that in some cases for the 5- and 10-year rules, RMDs are not required).

Consider coordinating with a financial advisor and a tax professional to coordinate a strategy that best fits with your financial circumstance.