Most individual retirement accounts (IRA) require that you start taking distributions from your account once you reach the age of 73. If you don’t, you’re hit with steep penalties each year you fail to take your RMD. The Roth IRA is the only exception. You don’t have to take any distributions from your account as long as you’re alive. If you inherit an IRA, you’ll have several withdrawal options depending on your relationship to the original account holder.
What is an RMD?
RMD stands for required minimum distribution. Because retirement accounts are tax-advantaged, the IRS doesn’t let you keep money compounding in your account tax-free forever.
Most retirement accounts have an RMD rule, which states that you must start taking distributions from your account when you reach the age of 73. You must take an RMD every year until your account is emptied.
If your retirement account has an RMD, you must take your first RMD on April 1, the year after you turn 73 years old. All future RMDs must be taken by December 31, each year.
What are the penalties for not taking an RMD?
If you fail to take your RMD, you’ll be hit with a penalty tax of 50% of the amount you were supposed to withdraw. For example, if your RMD was $2,000 for the year, you would have to pay $1,000 of it in penalties.
Does a traditional IRA have RMDs?
Yes, a traditional IRA does have RMDs. You will be required to start taking distributions from your account when you reach the age of 73. Qualified withdrawals made from a traditional IRA are taxed as regular income, since you contributed to your account with pre-tax dollars.
Are RMDs from a traditional IRA taxed? When you take your RMD from a traditional IRA, you will have to pay income taxes on the amount withdrawn since contributions were made with pre-tax dollars.
Does a Roth IRA have RMDs?
A Roth IRA does not have required minimum distributions. You can keep your money compounding tax-free in your account as long as you’re alive, and can even pass down your Roth IRA to your beneficiaries. Any other IRA like a traditional IRA, SEP IRA, or SIMPLE IRA requires that you start taking distributions every year, starting from when you turn 73 years of age.
Are RMDs from a Roth IRA taxed? RMDs from a Roth IRA are tax-free as long as the original account holder held their account for at least 5 years. If they did not, withdrawals are taxed. For tax-free withdrawals, you would need to wait until 5 years would have passed since the original account holder made their first contributions.
Does a SEP IRA and SIMPLE IRA have RMDs?
Yes, a SEP IRA and SIMPLE IRA both have RMDs. If you have a SEP IRA or SIMPLE IRA, you’re required to start taking distributions each year when you turn 73 years of age. RMD rules apply whether you’re an employer or employee with a SEP IRA or SIMPLE IRA.
Are RMDs from a SEP IRA and SIMPLE IRA taxed? Yes, withdrawals from a SEP IRA and SIMPLE IRA are taxed as regular income since you contributed with pre-tax dollars.
Does an inherited IRA have an RMD?
Inherited IRAs all have RMDs, even Roth IRAs. While a Roth IRA does not have RMDs for the original owner, inherited Roth IRAs require that beneficiaries take RMDs.
Failure to take an RMD will result in a 50% penalty on the amount required to be withdrawn.
However, the rules are different for spouses, non-spouses, and entities (like trusts, estates, and charities).
If you inherit an IRA from your spouse
If you inherit an IRA from your spouse (whether it’s a traditional IRA or Roth IRA), you have several different options.
- Do a spousal transfer: If you are the sole beneficiary of the account, then you could transfer the assets into your own IRA and will have the same withdrawal rules as the original holder of the account. For example, if you inherit a Roth IRA from your spouse as the sole beneficiary, you could transfer the assets into your own Roth IRA. If you inherit a traditional IRA from your spouse as the sole beneficiary, you could transfer the assets int your own traditional IRA. Because you’re transferring the assets into your own account, you will not have to take an RMD until you reach the age of 73 years old for a traditional IRA. Your Roth IRA does not have an RMD, even after transferring funds from your inherited Roth IRA.
- Move the money into an inherited IRA: You could also choose to transfer the assets into an inherited IRA, created in your own name. You must take RMDs based on your life expectancy score, starting on December 31, the year after your spouse has passed away. Distributions from a Roth IRA would be tax-free if your spouse held the account for at least 5 years before passing. If your spouse was younger than you, you could instead choose to take your RMDs based on your spouse’s life expectancy score.
- 10-year method: With a 10-year method, you would also first transfer the funds into an inherited IRA. But instead of taking RMDs based on life expectancy, you would spread your distributions over a 10 year period. You can choose to withdraw however much you like, but the account must be emptied by December 31, ten years after your spouse has passed. For Roth IRAs, if the original account holder held the account for at least 5 years, distributions would be tax-free.
- Cash it all out at once: You could choose to take the money as a lump sum payment. For a Roth IRA, there would be no taxes as long as the original account holder has had the account for at least 5 years before passing.
If you inherit an IRA from a non-spouse
If you inherit an IRA from a non-spouse, you have to determine whether you’re a:
- Eligible designated beneficiary: A spouse who does not want to qualify for spousal transfer, a minor child, an individual who is disabled or chronically ill, or an individual who is less than 10 years younger than the original account holder.
- Designated beneficiary: Any individual who is not a spouse, but named as a beneficiary of the account.
- Non-designated beneficiary: Trusts, estates, and charities. For example, if no beneficiary was named, the estate will need to withdraw all the money out of the account.
Eligible designated beneficiaries can take RMDs from an inherited IRA based on their life expectancy.
Designated beneficiaries must withdraw all the money before 10 years has passed since the original account holder’s death.
Non-designated beneficiaries have 5 years to withdraw all the money.
What is the 5-year rule?
There are two different 5-year rules for an inherited IRA.
First, if the original account holder of a Roth IRA held their account for at least 5 years, distributions and RMDs of earnings from an inherited Roth IRA would be tax-free. You’re still allowed to withdraw only the contributions made to the Roth IRA at any time without penalties or taxes. If the account holder did not hold their account for at least 5 years, you would need to wait until the 5 year mark from when the original account holder made their first contribution before you can withdraw earnings tax-free.
The second 5-year rule applies to timing of withdrawals. If no beneficiary was named for an IRA, the estate would need to withdraw the money before 5 years has passed since the original account holder’s passing.
How do I calculate RMD amounts?
To calculate your RMD, the IRS takes the balance from your traditional IRA as of December 31, the previous year, and divides it by your life expectancy factor.
Your life expectancy factor can be viewed using our RMD table or by using the table displayed below:
|Age||Life Expectancy Factor||Percentage of Account Balance|