Understanding Inherited Retirement Accounts

When you inherit a retirement account from your spouse, it is important to understand the rules that apply. A required minimum distribution (RMD) is the amount the IRS mandates to be distributed from an individual retirement account (IRA) or other retirement account on an annual basis, and this distribution is typically 100% subject to ordinary income tax rates. The primary factors that determine whether an RMD must be taken from the account, as well as the timing and requirements, are as follows:

1. the date the account holder passed away,
2. whether the account holder passed away before or after their required beginning date,¹
3. the beneficiary’s relation to the deceased account owner, and
4. the type of retirement account inherited.

The SECURE Act, passed in December 2019, provided significant changes to the distribution requirements of retirement plans, but only for retirement account owners who pass away on or after January 1, 2020. The content below is divided into two sections, differentiating the rules for beneficiaries inherited “Pre‐SECURE” (death of an owner on or before December 31, 2019) and “Post‐SECURE” (death of an owner on or after January 1, 2020).

To learn about taking RMDs from your own retirement account, review our Frequently Asked Questions About RMDs.

The following is a summary of the general rules; however, the law is so complex in this area that guidance from a CPA or attorney is required. Beacon Pointe Advisors does not calculate RMDs from retirement accounts nor offers tax or legal advice.

Rules for ALL Inherited Retirement Accounts

Calculating an RMD: If you must take an RMD from an inherited IRA, the RMD will be calculated by dividing the prior year-end account balance by a payout period based on a certain life expectancy. The IRS provides three life expectancy tables, the proper use of which will vary based on circumstance. Whether calculating the RMD for your own IRA or an IRA inherited from a loved one, please work with your tax advisor to ensure you utilize the correct tables.

Year‐of‐Death RMD: If the account owner passes away before they were required to take RMDs, there is no RMD in the year‐of‐death. However, if the account owner passed away after they were required to take RMDs, and the decedent had not withdrawn the entire RMD, the beneficiary must take the remaining RMD in the year of death. The beneficiary is liable for the tax on any year‐of‐death remaining RMD, and the RMD must be taken before transferring the decedent’s IRA to any subsequent inherited retirement account.

No Early Withdrawal Penalties: There are no early withdrawal penalties for distributions to beneficiaries under age 59½.

Penalties for Failing to Withdraw an RMD: We recommend working with your CPA to ensure you take the correct RMD, as missed RMDs incur a 25% penalty.³

Multiple Beneficiaries: Separate inherited IRAs must be established for each beneficiary by December 31 of the year following the year of death. Otherwise, distributions may be based on the least flexible distribution option. Note that special rules may apply when multiple beneficiaries inherit their share of an IRA through an estate or a single trust named as beneficiary, so a discussion with your estate attorney is required.

Death of a Beneficiary of an Inherited IRA: The rules below relate to the original beneficiary of an inherited IRA. When such an initial beneficiary of an IRA passes away, if any assets remain, there are additional rules to consider for the subsequent beneficiary. Contact your tax or legal advisor to determine the applicable rules in each situation.

Pre‐SECURE Act, Inherited IRAs, and Stretch IRAs:
Death of Account Owner on or before 12/31/19

Beneficiary is a Spouse. As the surviving spouse, you likely elected one of two options: (1) treat the inherited account as your own by rolling it over to your own IRA, or (2) roll the account into an inherited IRA (also called a Beneficiary IRA).

If you rolled your spouse’s retirement account to your own IRA, you became the “owner” of the plan, in contrast to the beneficiary. Click here for the general FAQs about RMDs.

If you rolled your spouse’s retirement account into an inherited IRA, you elected to be treated under rules set for spousal beneficiaries. RMDs must begin the later of the year after the deceased spouse’s death or the year in which the decedent would have been required to take RMDs (i.e., age 70 ½ for deaths before 2020). Once RMDs begin, you generally must base the RMD for years after the year of the owner’s death using the Single Life Expectancy Table for your age at the year-end following the year of the decedent’s death. The RMDs are recalculated annually based on your age each year.

Beneficiary is an Individual. If you are a non‐spouse beneficiary, you would have been required to roll the account to an inherited IRA (also called a Beneficiary IRA) by the end of the year after the account owner’s death.

Account owner died on or before they were required to begin taking RMDs. Your RMDs would have started the year after the year of the account owner’s death. You generally must base the RMD for years after the year of the owner’s death using the Single Life Expectancy Table for your age at the year‐end following the year of the decedent’s death and reducing the beginning life expectancy by one for each subsequent year. Some qualified plan provisions may have required an individual designated beneficiary to take the entire account by the end of the fifth year following the year of the owner’s death.

Account owner died on or after they were required to begin taking RMDs. Your RMDs would have started the year following the account owner’s death. The annual distributions can be stretched over the longer of your life expectancy or the deceased owner’s life expectancy. Once the RMD is calculated for the first year after the deceased owner’s death, you reduce the beginning life expectancy (of the older beneficiary or deceased owner) by one for each subsequent year.

Beneficiary is not an Individual (e.g., an estate, charity, or some trusts).

Account owner died on or before they were required to begin taking RMDs. The entity must take the entire account balance by the end of the fifth year following the year of death. There are no RMDs during the five‐year period.

Note on Trusts: Some trusts qualify as “conduit” or “see‐through” trusts, as they “see‐through” to the underlying beneficiary. The RMD rules are based on the rules for individual beneficiaries applied to the current income beneficiaries. Other trusts do not qualify for this exception and will follow the RMD rules for a non‐individual beneficiary. If you are the
trustee of a trust that is the beneficiary of an inherited IRA, contact your estate attorney to confirm the RMD rules.

Post‐SECURE Act, Inherited IRAs:
Death of Account Owner on or after 01/01/20

In contrast to decedents who passed away before 2020, the SECURE Act requires that accounts inherited in 2020 or later must be distributed entirely by the end of the tenth year following the account owner’s passing. Certain classifications of beneficiaries, defined below as Eligible Designated Beneficiaries, have more flexible rules similar to the “Stretch IRAs” for beneficiaries prior to the SECURE Act.

Non‐Eligible Designated Beneficiaries

Death before they were required to begin taking RMDs. Most individual beneficiaries must withdraw the entire account value by the end of the 10th anniversary year of the account owner’s death (the “10‐year rule”). There are no RMDs over this term.

Death on or after they were required to begin taking RMDs. Most individual beneficiaries must withdraw the entire account value by the end of the 10th anniversary year of the account owner’s death (the “10‐year rule”) OR the beneficiary’s life expectancy, if earlier. It is still unconfirmed whether annual RMDs will be required over the 10‐year period

Eligible Designated Beneficiaries – Exceptions to the New Rules

The SECURE Act provides that certain beneficiaries may qualify as “Eligible Designated Beneficiaries” (EDBs) and are not subject to the 10‐year rule. Status as an EDB is determined at the date of the owner’s death and cannot be changed. EDBs include the following categories:

Surviving Spouses – As the surviving spouse, you will likely elect either (1) to roll the decedent’s IRA into your own IRA, following the traditional rules as an IRA owner rather than the beneficiary, or (2) to roll into an inherited IRA (also called a Beneficiary IRA), following the rules below as an EDB.

If roll to your own IRA, you become the “owner” of the plan, in contrast to the beneficiary. Click here for the general FAQs about RMDs.

If roll to an inherited IRA, you elected to be treated under rules set for spousal beneficiaries. RMDs must begin the year after the deceased spouse’s death or the year in which the decedent would have been required to take RMDs based on their year of birth, whichever is later. Once RMDs begin, RMDs are based on the longer of your life or the decedent’s life expectancy, whichever is longer.

Minor Children – If the account owner’s child‐beneficiary is a minor at the time of the owner’s death, the child must take annual RMDs based on the minor child’s life expectancy until reaching the age of majority (proposed age 21). Then, the ten‐year period begins– the entire account must be paid out by the end of the year that contains the minor’s 31st birthday or the 10th anniversary of the date of the minor’s death if the death occurred before age 21. Note that non‐child minor beneficiaries do not qualify as EDBs and are still subject to the 10‐year rule.

Beneficiaries Not More Than 10 Years Younger, Disabled and/or Chronically Ill – If you qualify under these three exceptions, you must take RMDs beginning the year after the year of the account owner’s death. The RMDs are based on your life expectancy or the decedent’s life expectancy, if longer. Note that the status of these exceptions is determined at the time of death; if you become disabled or chronically ill after an owner’s death, you will not be considered an EDB.

Inherited Roth IRAs

Inherited Roth IRAs are subject to the same rules as those inherited on or before an account owner’s required distribution beginning date. Most non‐spouse beneficiaries must withdraw all assets held in inherited retirement accounts by the tenth year following the account owner’s passing. Within the ten years, however, there may or may not be distribution requirements (pending Final Regulations as discussed above).

Inherited Employer‐Sponsored Retirement Plans (e.g., 401(k)s)

The terms vary by company and by the plan. Generally, employer‐provided retirement plans require that the funds left in
an account be withdrawn within five years of the employee’s death. However, many people roll all inherited retirement plans into an inherited IRA for simplicity and ease of investing.

Beneficiary is not an Individual (e.g., estate, charity, or some trusts)

Similar rules apply to the pre‐SECURE Act. If you are the trustee of a trust that is the beneficiary of an inherited IRA, contact your estate attorney to confirm the RMD rules.

If you could benefit from a conversation with our advisory team, we would be happy to provide a complimentary consultation.    

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