RMD Basics for Inherited and Stretch IRAs
If you inherit or stretch an IRA, you have certain tax obligations with respect to required minimum distributions, or RMDs. RMDs are minimum amounts that you must withdraw annually, based on IRS rules.
Here are some common scenarios with respect to inherited and stretch IRAs, and how RMDs are handled.
The IRS provides important taxpayer
information for beneficiaries of
inherited IRAs and other retirement
vehicles. RMD rules related to
inherited and stretch IRAs are
complicated, and missing or neglecting
to take the appropriate RMDs can have
serious financial consequences. For
this reason, you may want to consult
with a tax professional as part of
Spouse inherits an IRA from a spouse younger than 70½ and makes the IRA his or her own. The same RMD rules are followed as if the receiving spouse was the owner from the beginning. For traditional IRAs, IRS rules mandate that you take your first RMD by April 1 of the year following the calendar year in which you reach 70½ years of age. For each subsequent year after you begin taking RMDs, you must withdraw your RMD by December 31. If you inherit a Roth IRA, you do not pay taxes on distributions you take (though earnings generally will be taxable if withdrawn before age 59 ½ and until a five-year holding period has been met).
Spouse inherits an IRA from a spouse 70½ or older and makes the IRA his or her own. If a traditional IRA, you are required to take an RMD for the year of the account holder’s death if the account holder did not already do so, and every year thereafter. If you inherit a Roth IRA, you do not pay taxes on distributions you take (though earnings generally will be taxable if withdrawn before age 59 ½ and until a five-year holding period has been met).
Spouse inherits an IRA and treats him/herself as the beneficiary (as opposed to the account holder). In essence, you create an “inherited IRA,” into which the assets of the original IRA are transferred. Distributions are spread over your single life expectancy and must begin no later than December 31 of the year the original account holder would have reached 70½. RMDs are required and you are taxed on each distribution in excess of the decedent’s basis if it is a traditional IRA. This also holds true for non-spouses. (See IRA with basis in IRS Publication 590-B).
Non-spouse beneficiary(ies) of any age who want to "stretch" the IRA over their own life expectancies. RMDs are mandatory for traditional or Roth IRAs and must start no later than December 31 of the year following the original account holder’s death. In the case of most inherited IRAs, each beneficiary’s age and remaining life expectancy are used to figure RMDs.
Non-spouse beneficiary of any age who want to "stretch" the IRA over the life of someone else (beneficiary-of-a-beneficiary scenario). RMDs are mandatory for the initial beneficiary, and must start no later than December 31 of the year following the original account holder’s death. Should the initial beneficiary die or pass the IRA to another beneficiary, that second beneficiary must use the remaining life expectancy of the original beneficiary to calculate RMDs.
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