How to Figure Required Minimum Distribution from Inherited IRA
Understanding how to calculate the required minimum distribution (RMD) from an inherited IRA is crucial for individuals who have inherited an IRA from a deceased account holder. The RMD is the minimum amount of money that must be withdrawn from an IRA each year, starting the year after the original account holder’s death. Failure to take the correct RMD can result in penalties and fines. Here’s a step-by-step guide on how to figure the required minimum distribution from an inherited IRA.
1. Determine the Beneficiary’s Life Expectancy
The first step in calculating the RMD is to determine the life expectancy of the beneficiary. If the beneficiary is an individual, such as a spouse, child, or grandchild, you will use the single life expectancy table provided by the IRS. For example, if the beneficiary is a 50-year-old child, you would look up the corresponding life expectancy factor in the table, which is typically around 19.6 years.
2. Calculate the IRA Balance
Next, you need to determine the IRA’s balance as of December 31 of the year before the year in which the RMD is being calculated. This balance is typically found on the most recent year-end statement from the IRA custodian.
3. Apply the Appropriate Distribution Factor
Once you have the IRA balance and the life expectancy, you need to apply the appropriate distribution factor from the IRS Uniform Lifetime Table. Multiply the IRA balance by the corresponding factor to determine the RMD. For example, if the IRA balance is $100,000 and the life expectancy factor is 19.6, the RMD would be $5,098.03 ($100,000 x 0.05098).
4. Adjust for the First Year’s RMD
If the inherited IRA was inherited in the same year as the original account holder’s death, the RMD for the first year may be different. In this case, you would divide the IRA balance by the life expectancy factor plus one. For example, if the IRA balance is $100,000 and the life expectancy factor is 19.6, the first-year RMD would be $5,050.26 ($100,000 / (19.6 + 1)).
5. Consider Special Circumstances
In some cases, special circumstances may affect the RMD calculation. For example, if the deceased account holder did not take a required minimum distribution in the year of death, the RMD for the first year of the inherited IRA may be higher. Additionally, certain beneficiaries, such as surviving spouses and disabled individuals, may be eligible for different RMD rules.
6. Keep Track of RMDs
It’s essential to keep accurate records of the RMDs taken from the inherited IRA each year. Failure to take the correct RMD can result in penalties equal to 50% of the amount not withdrawn.
In conclusion, calculating the required minimum distribution from an inherited IRA involves determining the beneficiary’s life expectancy, calculating the IRA balance, applying the appropriate distribution factor, and considering any special circumstances. By following these steps, individuals can ensure they are in compliance with IRS regulations and avoid costly penalties.
