What is the required minimum distribution for inherited IRA?
Understanding the required minimum distribution (RMD) for inherited IRAs is crucial for individuals who have inherited an IRA from a deceased account holder. The RMD is the minimum amount of money that must be withdrawn from an IRA each year after the account holder’s death. This rule applies to both traditional and Roth IRAs, and failing to comply with the RMD requirements can result in penalties and tax consequences. In this article, we will delve into the details of the required minimum distribution for inherited IRAs, including who is eligible, how to calculate it, and the potential tax implications.
The required minimum distribution for inherited IRAs is determined by the IRS and is based on the account holder’s life expectancy. For inherited IRAs, the life expectancy is calculated using the Single Life Expectancy Table, which is provided by the IRS. This table takes into account the age of the deceased account holder at the time of death and the age of the beneficiary at the time the inheritance occurs.
Eligibility for Required Minimum Distribution
To be eligible for the required minimum distribution for an inherited IRA, the beneficiary must be one of the following:
1. A surviving spouse who is more than 10 years younger than the deceased account holder.
2. A child of the deceased account holder who is not yet 21 years old.
3. A disabled or chronically ill individual.
4. Any other beneficiary who is not a spouse, child, or disabled individual.
If the beneficiary does not fall into one of these categories, the inherited IRA is considered a non-spouse beneficiary IRA, and the RMD rules are different.
Calculating the Required Minimum Distribution
To calculate the required minimum distribution for an inherited IRA, the following formula is used:
RMD = IRA balance as of December 31 of the previous year / Life Expectancy Factor
The Life Expectancy Factor is determined by the IRS Single Life Expectancy Table. This table provides factors for different age brackets, and the appropriate factor is used based on the age of the deceased account holder at the time of death.
For example, if the deceased account holder was 70 years old at the time of death and the inherited IRA balance is $100,000, the Life Expectancy Factor from the Single Life Expectancy Table for a 70-year-old is 22.9 years. Therefore, the RMD for the first year would be:
RMD = $100,000 / 22.9 = $4,374.19
Tax Implications
The required minimum distribution from an inherited IRA is considered taxable income to the beneficiary. The amount of tax owed will depend on the type of IRA inherited. For traditional IRAs, the RMD is taxed as ordinary income. For Roth IRAs, the RMD is not taxed, as the contributions were made with after-tax dollars.
It is important for beneficiaries to understand the tax implications of the RMD and to plan accordingly. Failure to withdraw the required minimum distribution can result in a 50% penalty on the amount not withdrawn.
In conclusion, the required minimum distribution for inherited IRAs is a critical aspect of managing an inherited IRA. By understanding the eligibility, calculation, and tax implications, beneficiaries can ensure compliance with the RMD rules and make informed decisions regarding their inherited IRA.
