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.
As the beneficiary, you may distribute the account assets in a lump sum without facing a 10% early withdrawal penalty. (If you inherit a Roth IRA, the account must have been open for at least five years to avoid paying a penalty.)
Q8. What happens if a person does not take a RMD by the required deadline? (updated Dec. 10, 2024) If an account owner fails to withdraw the full amount of the RMD by the due date, the amount not withdrawn may be subject to an excise tax of 25%, 10% if the RMD is timely corrected within two years.
The IRS has waived RMD requirements from inherited IRAs for 2024. Here's how to decide whether you should take or skip the withdrawal.
Inherited IRA RMD penalties take effect
The IRS has provided transitional relief for certain beneficiaries who were required to but did not take RMDs from their inherited IRAs in 2021 through 2024. Starting in 2025, a 25% penalty will generally be assessed for those who do not take their RMD.
If an RMD deadline is missed, the account owner will owe the IRS an excise tax on the shortfall. The penalty may be waived by the IRS if you can show that the shortfall was due to a reasonable error and that you are taking steps to remedy it.
Mistake #1: Not Starting Your RMD on Time
The rules for RMD starting ages have undergone changes in recent years, leading to confusion among many individuals. In the past, the starting age for RMDs was 70½. However, as of 2023, the starting age stands at 73 and is set to increase to 75 in the future.
If multiple beneficiaries inherit an IRA, it's often a good idea to split it into separate accounts. “This way, each beneficiary can manage their own distributions according to their financial needs and the required rules,” Carlson said.
The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.
Spacing out distributions over 10-year period
A beneficiary may consider spacing out distributions over the ten-year period to benefit from tax-deferred appreciation while also managing taxes. If the beneficiary retires during those years, waiting to take distributions until then may lower the overall tax bill.
The 10-Year Rule for Inherited IRAs. For most non-spousal beneficiaries who inherit an IRA after 2019, the IRA funds must be distributed to that beneficiary within 10 years after death. So, if an IRA owner dies in October 2024, the beneficiary must clean out the IRA no later than December 31, 2034.
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
If you don't take the RMDs from your account, you will be subject to a penalty equal to 25% of the amount that should have been withdrawn. Withdrawal rules that apply to inherited Roth IRAs are slightly different because the original owner was never required to take an RMD from their account.
Exceptions generally include: Roth IRAs* Your very first RMD, which you can delay until April 1 of the following year, but which would require you to take two RMDs that year. Retirement plans sponsored by your current employer, for which RMDs can be delayed until the year you separate from service.
According to the SECURE Act 1.0, an inherited IRA must be paid out completely to non-spouse beneficiaries within 10 years of the death of the original IRA account holder (often referred to as the 10-year rule). Moreover, the beneficiaries must also take RMDs in the same period.
You transfer the assets into an Inherited Roth IRA held in your name. Money is available: RMDs are mandatory and distributions must begin no later than 12/31 of the year following the year of death. Distributions are spread over the beneficiary's single life expectancy.
What is an inherited IRA? Also sometimes called a beneficiary IRA, an inherited IRA is an account that is opened when someone inherits an IRA after the original owner dies. The beneficiary may be anyone — a spouse, relative, or an estate or trust, for example.
There are a few things you can do to avoid paying taxes on an inherited IRA. The most obvious thing is to not take a lump-sum distribution. If you inherit the IRA from your spouse, wait until the required minimum distributions begin or take distributions based on your own life expectancy.
RMD rules to know: Who, when and how much
If you own a retirement account and have reached age 73, generally you will need to take an annual RMD each year before December 31. First year exception: You can delay taking your first RMD until April 1 of the year following the year you turn 73.
If the decedent died on/after the RBD, annual RMDs must continue over the deceased IRA owner's remaining single life expectancy (the ghost life rule). This can produce a post-death payout period exceeding 10 years.
If you are taking RMDs and collecting Social Security benefits, the RMDs will not impact the amount of your benefits—but it could impact how much of your Social Security benefit is taxable. The amount your Social Security is taxed depends on your annual income. RMDs may increase your taxable income.
Before the Secure Act of 2019, heirs could "stretch" inherited IRA withdrawals over their lifetime, which helped reduce yearly taxes. But certain accounts inherited since 2020 are subject to the "10-year rule," meaning IRAs must be empty by the 10th year following the original account owner's death.
Non-spouse designated beneficiaries must roll the assets over to an inherited IRA and most must withdraw all the money within 10 years, as noted above. There are some exceptions to the 10-year rule for non-spouse Eligible Designated Beneficiaries (EDBs):
Required minimum distributions (RMDs) are the minimum amount that you must withdraw from certain tax-advantaged retirement accounts. They begin at age 72 or 73, depending on your circumstances and continue indefinitely. There is, unfortunately, no age when RMDs stop.