Inherited IRA? How The New 2022 RMD Tables Affect You

The recent passing of the American Rescue Plan has brought about several changes to Inherited Individual Retirement Accounts (IRAs). One of the most significant changes is the new Required Minimum Distribution (RMD) tables that will go into effect in 2022. The new RMD tables will generally result in lower required distributions for most people, which means that more of the money in your Inherited IRA can stay invested and continue to grow tax-deferred. T

his can have a significant impact on the overall value of your Inherited IRA over time. If you are the beneficiary of an Inherited IRA, it is important to understand how the new RMD tables will affect you. This article will provide an overview of the new RMD tables and how they can benefit your personal finances.

What is an Inherited IRA?

An inherited IRA is also known as a beneficial IRA or a beneficiary IRA.  An Inherited IRA is an IRA that is passed down to a beneficiary after the account holder dies. 

The beneficiary of an IRA can choose to take distributions from the account, or keep the account open and continue to grow the balance. If the beneficiary is not the spouse of the account holder, they may have to take required minimum distributions (RMDs) from the account.

Required Minimum Distributions RMDs for an Inherited IRA

Because of the SECURE Act, the rules for inherited IRAs have become even more complicated. The options you have will depend on a lot of things, like the type of account you inherited, when you inherited it, how you were related to the deceased, and how old the person who died was when they died.

Are Inherited IRAs Affected by the New RMD Tables?

• The new required minimum distribution RMD tables for 2022 will affect anyone who is required to take an RMD from their retirement account. This includes people who are over the age of 72 and have a traditional IRA, 401(k), 403(b), or other tax-deferred retirement account. 
• The new tables will also affect people who have inherited a retirement account from someone who was over the age of 70½.
• The new RMD tables are based on life expectancy rates from the IRS’s most recent mortality tables. These tables are used to calculate how long a person is expected to live, based on their age and gender. 
• The new RMD tables will affect people in different ways, depending on their age and the size of their retirement account. The new tables reflect the fact that people are living longer than they used to. This means that the RMDs will be smaller than they were under the old tables.
• The new RMD tables will also affect people who have inherited a retirement account from someone who was over the age of 70½. The new tables will be used to calculate the RMD for the inherited account.

Inherited IRAs For People Who Passed Away Before January 1, 2020:

When a beneficiary becomes entitled to an IRA from an account owner who died before he or she was required to begin taking RMDs (April 1st of the year following the year in which the owner reached RMD age), the beneficiary can choose one of two methods of distribution.

Generally, the beneficiary of IRA and retirement accounts will use the Single Life Table as the inherited IRA RMD Table in 2022 (Table I, Appendix B, Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)). The table provides a life expectancy factor based on the beneficiary’s age. The account balance is divided by this life expectancy factor to determine the first RMD. The life expectancy is reduced by one for each subsequent year.

Spouse as sole primary beneficiary

If the owner’s spouse chooses to take the IRA as a beneficiary, he or she can choose when to begin taking RMDs on the basis of his or her own life expectancy. Spousal beneficiary should not enroll in our RMD Service until after the spousal’s RMD age.

Non-spouse and when spouse is not sole primary beneficiary.

Individual non-spouse beneficiary must begin taking RMDs on the basis of his or her own life expectancy by December 31 of the year after the owner’s death. If all multiple beneficiaries have not established separate accounts by that December 31 date, all beneficiaries must take RMDS on the oldest beneficiary’s life expectancy.

The Five Year Rule

An individual beneficiary may elect to take RMDs for inherited IRA assets over the 5 years following the death of the owner. The distribution must be completed by the end of the year containing the fifth anniversary of the deceased’s death. Any non-individual beneficiary (except for a qualified trust) must use the five-year rule if the owner died before beginning an RMD.

Passed Away AFTER January 1st 2020

People who inherit money from account owners who died after January 1, 2020, should read this section. 

What to Do If You Inherit an IRA from a Person Who Died in 2019 or Before:

• You have to take a certain amount out of some tax-deferred accounts each year. These are called required minimum distributions (RMDs). 
• It takes into account the value of an account on December 31st of last year and a life expectancy factor that is based on IRS Life Expectancy charts. 
• People who had a Traditional IRA when they were younger or would have had a Traditional IRA when they died are subject to RMDs if they were older than 72 (70 ½) at the time of death or would have been 72 (70 ½) in the year of death.

• Required Beginning Date RBD – This is the date that a person must start taking RMDs from their own IRA. When you inherit an account, the RBD will depend on how you roll over the money, how you were related to the original account owner, and how old the person who owned the account was when they died.

Related Readings:

Methods of Distribution:

1. Lump-sum method: The beneficiary takes all of the money out of the account at once.
   1. Income taxes may be due on the withdrawal, depending on the type of retirement account the money came from. 
   2. If you take out a lot of money, you might move into a higher tax bracket, which would apply to the money you took out. 
   3. To get tax-free money out of Roth IRAs, you must have had the account for at least 5 years.
   4. All of the beneficiaries can choose to get a lump sum.
2. Five year method: The person who inherits an IRA must distribute all of the money in it within five years after its original owner died. 
3. Ten Year Rule:  In 2019, the SECURE Act of 2019 came out with a new option for people who inherit money from an IRA.
   1. This option says that the person who inherits money from an IRA has to distribute the money within 10 years. Initially, there was a lot of confusion about RMD requirements after the Act was passed: You do not have to remove money in the first 9 years – as long as the account is depleted by year 10. 
   2. Some people who have an IRA can use this distribution method, but not everyone can.
4. Life Expectancy Method: Each year, the beneficiary of an IRA that was passed down to them must take RMDs from it.
   1. The life expectancy factor used to figure out RMDs is based on how you are related to the original account owner and how old they were when they died. Most people can use this method to get their money, but not everyone can.

Spouse

If you are the primary beneficiary of your spouse’s retirement assets, you can generally treat inherited assets as if they are your own. If not, you might be better off opening an inherited IRA and taking distributions using either the life expectancy, 10-year, or lump sum method. If you inherit a pre-tax Traditional IRA or a Roth IRA from your spouse, you have the option to open an inherited IRA and use the life expectancy method for distributions. Annual RMDs are not required in years 1-9, as long as the account is fully EDB

Non-Spouse EDBs

Have two options in addition to taking a lump sum. If the original account owner was subject to RMDs, the 10-year method is not an option. Minor children may use the life expectancy method only until they reach the age of 18. If you inherit a pre-tax Traditional IRA, the 10-year method may make the most sense. However, careful consideration should be taken in estimating your future tax bracket. Most likely, in the case of inherited Roth IRAs, it makes sense to use the life expectancy method.

Designated Beneficiaries

The most common example of a Designated Beneficiary is an adult child. Designated beneficiaries only have one option in addition to the lump sum, which is the 10-year method. For a pre-tax Traditional inherited IRA, if the original account owner was subject to RMDs at the time of their passing, an RMD would be required in the year of death.

Non Designated Beneficiaries

If the original account owner was subject to RMDs at the time of their death, the 10-year method applies. If they were not, non-designated beneficiaries must continue using the original’s single life expectancy. The 5-year period is similar to the previous method except the account must be fully distributed by the end of the fifth year following the year of death.

When a retirement account contains multiple beneficiaries, the IRA must be divided into separate accounts for each beneficiary by September 30 of the calendar year following the original account owner’s death. RMDs are calculated using the Life Expectancy Method according to the oldest beneficiary’s life expectancy factor.

Consider the various options available to those who inherit a retirement account with considerable assets. Each option is governed by a detailed set of rules and entails caveats that can make the decision extremely complicated. It is recommended that you review all your options with a trusted financial advisor or accountant.

Inherited Roth IRA RMDs

You don’t have to take RMDs from a Roth IRA while you are alive.

But people who inherit Roth IRAs have to take them. To figure out how much money you need to withdraw from a Roth account, you’d do the same thing you did above for a traditional IRA:

Source: Retire Beneficiaries IRS and Fidelity IRA Beneficiaries

SECURE Act’s 10-Year Rule 

The “Stretch IRA” has been basically eliminated with the new RMD rules of the SECURE Act

For an inherited IRA that came from a person who died after December 31, 2019:

Generally, the beneficiary of an IRA must close the account by the end of the 10th year after the death of the IRA owner (this is known as the 10-year rule). 

An Inherited IRA from  person who passed away prior to January 1st 2020:

An eligible designated beneficiary can use either the 10-year rule or the lifetime distribution rules that were in place before 2020.

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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.