What are the required minimum distributions for an inherited IRA?
When you inherit an Individual Retirement Account (IRA), it’s important to understand the rules surrounding required minimum distributions (RMDs). These distributions are the minimum amount of money you must withdraw from your inherited IRA each year, and failing to do so can result in penalties. In this article, we’ll explore the key aspects of required minimum distributions for inherited IRAs, including how they are calculated and the penalties for non-compliance.
The first thing to know about required minimum distributions for an inherited IRA is that they are different from those for a traditional IRA. For an inherited IRA, the RMD rules are based on the life expectancy of the designated beneficiary. This means that the amount you must withdraw each year will vary depending on how long you are expected to live.
Calculating Required Minimum Distributions for an Inherited IRA
To calculate the required minimum distribution for an inherited IRA, you’ll need to use the IRS’s life expectancy table. This table provides the life expectancy factor for each year after the year of the IRA owner’s death. For example, if you inherited an IRA from your parent and are 50 years old, you would use the life expectancy factor for someone who is 70 years old.
The formula for calculating the RMD is as follows:
RMD = IRA balance as of December 31 of the previous year / Life expectancy factor
For example, if your inherited IRA has a balance of $100,000 and the life expectancy factor for someone who is 70 years old is 22.9 years, your RMD would be:
RMD = $100,000 / 22.9 = $4,386.27
This amount must be withdrawn by December 31 of each year to avoid penalties.
Penalties for Non-Compliance
If you fail to take the required minimum distribution from your inherited IRA, you may be subject to a 50% penalty on the amount you should have withdrawn. This penalty is imposed by the IRS and is in addition to any taxes owed on the distribution.
It’s important to note that if you are the sole designated beneficiary of the inherited IRA, you have the option to take the entire balance of the IRA as a lump sum within five years of the IRA owner’s death. However, if you choose this option, you will not be able to spread the distributions over your lifetime, and you may be subject to a higher tax rate on the distribution.
Understanding the Rules and Planning Ahead
Understanding the required minimum distributions for an inherited IRA is crucial for managing your finances and ensuring compliance with IRS regulations. By knowing how to calculate your RMD and the potential penalties for non-compliance, you can make informed decisions about your inherited IRA.
It’s also a good idea to consult with a financial advisor or tax professional to help you navigate the complexities of inherited IRAs and required minimum distributions. They can provide personalized advice based on your specific situation and help you make the most of your inherited IRA while minimizing taxes and penalties.
