If you inherit an IRA from your spouse, you'll need to follow special rules for taking Required Minimum Distributions, or RMDs. You can take RMDs from a spousal inherited IRA starting in the year after the year of your spouse's death.
You can choose to take RMDs from your spouse's IRA or roll it over to your own IRA. If you roll it over, you'll need to follow the same RMD rules as if it were your own IRA.
You can take RMDs from a spousal inherited IRA as a lump sum or as annual installments.
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RMD Rules for Inherited IRAs
If the life expectancy of the designated beneficiary is less than five years, the five-year rule may offer more flexibility in the timing of withdrawals. This can be beneficial if the beneficiary's tax rate changes during that period.
The five-year rule can permit a delay in the starting date and provide discretion as to the amount of funds withdrawn each year, with no annual required distribution until the fifth year. For example, if the beneficiary prefers to have no distribution in the first three years following the IRA owner's death, the five-year rule could allow this.
Distributions must begin by the end of the year following the IRA owner's death if the life expectancy alternative is to apply.
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RMDs in General
The required beginning date for taking RMDs is April 1 of the year following the calendar year in which the IRA owner attains age 70½.
You can't delay RMDs beyond the required beginning date, unlike some qualified plan participants, because IRA owners can't delay distributions if they're still employed.
The minimum distribution must be made by December 31 of each year, starting with the year after the required beginning date.
To calculate the minimum distribution, you divide the December 31 account balance from the previous year by the remaining life expectancy of the account owner or their joint life expectancy with a designated beneficiary.
The Uniform Lifetime Table is used to determine the life expectancy for this calculation, unless you're married and your spouse is more than 10 years younger, in which case you can use your joint life expectancy from the Joint Life and Last Survivor Expectancy Table.
The owner of multiple IRAs must calculate the minimum distribution for each account separately and can aggregate these amounts into a total amount to be withdrawn from one or more of the IRAs.
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Posthumous Distribution Rules
If the life expectancy of the designated beneficiary is less than five years, the five-year rule may be more beneficial as it provides more flexibility in the timing of withdrawals.
The five-year rule allows the beneficiary to delay the starting date of distributions and can even permit no distributions in the first three years following the IRA owner's death.
The life expectancy rule, on the other hand, restricts the minimum withdrawal to a specific calculated amount and may stretch the payments over a longer deferral period.
Distributions must begin by the end of the year following the IRA owner's death if the life expectancy alternative is to apply.
The Uniform Lifetime Table is used to determine the life expectancy used in calculating the required distribution, unless the spouse is the sole beneficiary and is more than 10 years younger.
In that case, the IRA owner may use their joint life expectancy from the Joint Life and Last Survivor Expectancy Table, which provides a longer distribution period.
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The selection of a spouse as beneficiary may influence the lifetime distributions required of the IRA owner, making it a crucial decision to consider.
A penalty tax of 50% may be imposed on the difference between the RMD and the lesser actual distribution if the owner or beneficiary does not withdraw the required minimum amount.
Choosing a Beneficiary
Naming a beneficiary is a critical decision in estate planning. It's especially crucial if the IRA owner dies before the required beginning date, as failing to do so would result in the funds being distributed entirely within the five-year rule.
Not naming a beneficiary presents a missed opportunity to defer distributions over a younger, longer life expectancy. This can be a significant advantage for the beneficiary.
Careful consideration should be given to the status of a surviving spouse beneficiary. The IRA owner should protect the spouse's ability to choose ownership of the account by separating their interest from other beneficiaries.
The spouse must be the sole beneficiary of the account to have the ownership option. This is a key consideration for IRA owners with a spouse as the intended beneficiary.
Surviving Spouse Ownership and RMDs
Surviving spouses have the option to use their own life expectancy to maximize the distribution period, giving them the greatest flexibility in using this choice.
The Uniform Lifetime Table provides longer distribution periods than the Single Life Expectancy Table, which is used by beneficiaries. For example, a 70-year-old spouse would have a 27.4-year life expectancy from the Uniform Lifetime Table as an IRA owner, but only 17 years as a beneficiary.
Surviving spouses can make the ownership election at any time after the IRA owner's death, which applies to the entire remaining interest of the spouse.
Before choosing the ownership alternative, a surviving spouse should consider the potential necessity of early withdrawals that may become subject to the 10% penalty on distributions before age 59½.
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