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Required Minimum Distributions, Inherited Plans

by: Michael Snowdon, CFP®, CRPC®

Traditional retirement savings/investment plans require minimum distributions (RMDs). RMDs apply to all accounts that provide tax-deferred earnings (including inherited Roth accounts). The requirements vary depending on your relationship to the decedent.

Prior to having to meet RMDs you can withdraw any amount at any time without penalty (ordinary income taxes will be due). Eventually, however, you will be required to withdraw RMDs. However, beneficiaries have a one-year waiver for 2020 and do not have to withdraw anything during this year. When you do have to withdraw RMDs again if you do not withdraw enough the IRS will assess a 50% penalty on any amount not withdrawn that should have been. So, if you should have withdrawn $1,000 and only withdrew $500 you will get a 50% penalty tax on the remaining $500 = $250.

You may have heard that non-spousal beneficiaries can spread RMDs over their lifetime (i.e., stretch IRA). Under the SECURE act, this is no longer true. The under the new rules, most non-spouse beneficiaries, referred to as “Non-Eligible Designated Beneficiaries,” must withdraw all funds in the inherited retirement account by the end of the tenth year after the original account owner’s year of death. RMDs do not have to be taken every year, but the account must be liquidated by the end of the tenth year. Taking the distributions each year will avoid having to make a large single tax payment at the end of 10 years.

Surviving spouse eligible designated beneficiaries, however, can still stretch out distributions from a retirement account inherited from the decedent spouse over their own lifetimes, or roll over the inherited IRA into their own IRA. If the decedent had not begun taking RMDs, the beneficiary spouse can elect to withdraw RMDs based on the deceased owner’s age as of the birthday in the year of death. They also may elect to withdraw required amounts over a 10-year period. This includes Roth accounts. So, the new distribution rules do not affect them. Of course, as long as they follow RMD rules, they can withdraw any amount at any time, and are not limited to only withdrawing the RMD amount.

Minor children have their own rules. A minor child who inherits a retirement account from a parent must begin taking the RMDs over that child’s lifetime, but only until the child reaches the age of majority. Once they reach that age, they have to follow the 10-year rule.

Other rules and regulations apply, and we still need clarity on how some provisions of the SECURE act will be implemented, so you will want to consult a qualified trusted advisor. See IRS chart that follows for each current distribution requirement.

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