Are RMDs Waived for Inherited IRAs?
Inherited IRAs, also known as rollover IRAs or inherited IRAs, are a common form of retirement accounts that individuals receive upon the death of an IRA owner. One of the most frequently asked questions about inherited IRAs is whether required minimum distributions (RMDs) are waived for these accounts. In this article, we will explore this topic and provide an in-depth analysis of the rules surrounding RMDs for inherited IRAs.
Understanding Required Minimum Distributions (RMDs)
Required minimum distributions (RMDs) are the minimum amounts that must be withdrawn from certain retirement accounts each year after the account owner reaches a certain age. For traditional IRAs, the RMDs must begin by April 1st of the year following the year the account owner turns 72 (or the year they reach age 70½ if they turned 70½ before January 1, 2020). For inherited IRAs, the RMD rules are different and can significantly impact the inherited account’s tax implications.
Waiver of RMDs for Inherited IRAs
The short answer to the question of whether RMDs are waived for inherited IRAs is no. Inherited IRAs are subject to RMDs, but the rules for calculating and taking these distributions differ from those for original IRAs. Here’s a breakdown of the key points:
1.
Calculating RMDs for Inherited IRAs
Inherited IRAs are subject to RMDs, but the calculation of these distributions is based on the life expectancy of the beneficiary. The life expectancy is determined using the IRS Single Life Expectancy Table and is based on the beneficiary’s age at the end of the calendar year in which the RMD is due.
2.
Deemed Distribution Rule
When an inherited IRA owner dies before taking their RMD, the IRS allows for a deemed distribution to be calculated. This deemed distribution is the RMD that would have been required if the owner had taken the distribution on the required distribution date. This deemed distribution is subtracted from the inherited IRA’s value for the following year’s RMD calculation.
3.
Spousal RMDs
If the IRA owner’s spouse is the sole beneficiary, the spouse can treat the inherited IRA as their own IRA and take RMDs based on their own life expectancy. This can provide more flexibility in managing the inherited IRA’s assets.
4.
Beneficiary Options
Beneficiaries have several options for receiving RMDs from an inherited IRA, including taking them annually, over a fixed period, or as a lump sum. The choice of option depends on the beneficiary’s financial needs and tax considerations.
Conclusion
In conclusion, RMDs are not waived for inherited IRAs. Beneficiaries must calculate and take RMDs based on the life expectancy of the IRA owner. Understanding these rules is crucial for managing inherited IRAs effectively and minimizing potential tax liabilities. Consulting with a financial advisor or tax professional can help beneficiaries navigate the complexities of inherited IRAs and ensure compliance with RMD regulations.
