How to Compute RMD for Inherited IRA
Understanding how to compute the Required Minimum Distribution (RMD) for an inherited IRA is crucial for beneficiaries who are responsible for managing these accounts. The RMD is the minimum amount of money that must be withdrawn from an IRA each year after the account owner’s death. Failure to comply with these rules can result in penalties and additional taxes. In this article, we will discuss the steps and considerations involved in computing the RMD for an inherited IRA.
Step 1: Determine the Account Owner’s Age at Death
The first step in computing the RMD for an inherited IRA is to determine the age of the account owner at the time of their death. This information is essential because it determines the life expectancy factor that will be used to calculate the RMD.
Step 2: Identify the Beneficiary’s Life Expectancy
Once the account owner’s age is known, the next step is to identify the life expectancy of the beneficiary. There are two types of beneficiaries: designated beneficiaries and non-designated beneficiaries.
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Designated Beneficiaries:
If the IRA account had designated beneficiaries at the time of the account owner’s death, the RMD is calculated based on the designated beneficiaries’ life expectancies. The life expectancy is determined using the Single Life Expectancy Table provided by the IRS.
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Non-Designated Beneficiaries:
If the IRA account did not have designated beneficiaries, the RMD is calculated based on the life expectancy of the oldest living beneficiary. This could be a spouse, child, or other designated individual. The life expectancy is determined using the Joint and Last to Die Table provided by the IRS.
Step 3: Calculate the RMD
With the life expectancy factor determined, the next step is to calculate the RMD. The formula for calculating the RMD is:
RMD = IRA Balance as of December 31 of the previous year / Life Expectancy Factor
It is important to note that the RMD must be withdrawn by December 31 of the year following the year in which the account owner passed away.
Step 4: Consider the Stretch IRA Strategy
One popular strategy for inherited IRAs is the Stretch IRA, which allows beneficiaries to spread out the RMDs over their lifetime. This strategy can be particularly beneficial for younger beneficiaries who may have a longer life expectancy. However, it is important to understand the tax implications and potential penalties associated with this strategy.
Step 5: Keep Detailed Records
Maintaining detailed records of the RMD calculations, withdrawals, and any related correspondence with the IRS is crucial. This documentation will be helpful in case of an audit or other inquiries.
In conclusion, computing the RMD for an inherited IRA involves several steps and considerations. By following these guidelines and understanding the rules and regulations, beneficiaries can ensure compliance with the IRS and make informed decisions regarding their inherited IRAs.
