Inherited IRA rules: How beneficiaries can avoid costly IRS penalties
Inheriting an Individual Retirement Account (IRA) comes with strict withdrawal rules. Those who fail to follow them face steep penalties, including fines of up to 25% of the missed amount. The Internal Revenue Service (IRS) sets these requirements, which vary depending on the beneficiary's relationship to the original owner and the owner's age at death.
The IRS outlines different rules for beneficiaries in Publication 590-B, updated with tables from Notice 2022-53. Eligible designated beneficiaries—such as a surviving spouse, minor child, disabled or chronically ill individual, or someone no more than 10 years younger than the original owner—have more flexibility. A surviving spouse can either treat the IRA as their own, following standard RMD rules, or take life expectancy payments without a 10% penalty.
Non-spousal eligible beneficiaries can choose between life expectancy payments or the five-year or 10-year rule, depending on when the original owner died. Life expectancy payments start the year after the owner's death and use IRS Table I (Single Life Expectancy). The account balance is divided by the beneficiary's life expectancy factor to determine annual withdrawals. Non-eligible designated beneficiaries must follow stricter rules. If the original owner died before their required beginning date (RBD)—April 1 of the year after turning 73—they must empty the account within 10 years. If the owner died after their RBD, beneficiaries can take life expectancy payments starting the year after death. The five-year rule requires the IRA to be fully withdrawn by December 31 of the fifth year after the owner's death. The 10-year rule extends this deadline to December 31 of the 10th year. Missing an RMD triggers a 25% penalty, though this may drop to 10% if corrected promptly.
Beneficiaries must carefully follow IRS guidelines to avoid costly mistakes. The rules depend on the original owner's age at death and the beneficiary's relationship to them. Proper planning ensures compliance and minimises financial penalties.
Read also:
- India's Agriculture Minister Reviews Sector Progress Amid Heavy Rains, Crop Areas Up
- Sleep Maxxing Trends and Tips: New Zealanders Seek Better Rest
- Over 1.7M in Baden-Württemberg at Poverty Risk, Emmendingen's Housing Crisis Urgent
- Life Expectancy Soars, But Youth Suicide and Substance Abuse Pose Concern
