What to know about RMDs on inherited retirement assets

If you are the spouse of the original account owner, you’ll have the most options for how to handle inherited accounts. Deciding which option is right for you can be challenging. Your age and goals—including whether you need access to the money—may factor into the decision.

You may consider spreading withdrawals over a longer period of time to avoid getting bumped into a higher tax bracket by taking out too much money at once. Longer withdrawal periods also let you continue to get the tax advantages on further growth, whether tax deferred or tax free, depending on the account.

Your RMD decision generally should also take into account your other personal income. As you review the RMD rules, be sure to consider the pros and cons of each option to get the best outcome for you.

And once you’ve chosen your strategy, remember not to miss any RMD deadlines. There is a 25% penalty on any RMD that is required but not taken on time. However, if the late RMD is taken within a two-year period, the penalty may be reduced to 10%.
 

Surviving spouses have the most options

If you’re a surviving spouse, you have two main options when inheriting a traditional IRA:

• You can roll it over to your own traditional IRA if you are the sole beneficiary. The money will then be subject to the regular RMD rules for your IRA. It gives you more options when it comes to withdrawing the money and may allow you to make additional contributions to the account. However, withdrawals prior to age 59½ would be subject to a 10% tax penalty.

• You can move the money to an inherited IRA. This may be a good option if you are older than your spouse was when they passed since it allows you to start RMDs based on their age instead of yours. It may also be good if you’re younger than 59½ and need access to the money. That’s because inherited IRAs do not have early withdrawal penalties.

The RMD rules for inherited IRAs depend on whether the original account owner had already reached their RMD age or not.

If the original owner had not yet reached their RMD age, you can either:

a) Start taking annual RMDs in the year the original owner would have been required to do so based on your single life expectancy.

b) Withdraw the full balance of your inherited IRA in any way you choose by December 31 of the 10th year of their passing (no annual RMDs necessary).

If the original owner had already reached their RMD age, you can either:

a) Continue annual RMDs based on whichever is longer: your single life expectancy or what would have been your spouse’s remaining life expectancy.

b) Take annual RMDs for nine years and then withdraw the full balance by December 31 of the 10th year of their passing.

Other eligible designated beneficiaries also have options

Eligible designated beneficiaries other than a spouse or minor child (i.e., a disabled or chronically ill person or a non-spouse who is not more than 10 years younger than the original account owner) can either take RMDs annually based on their own life expectancy or take distributions from the account over a 10-year period as long as the original owner had not yet reached their RMD age. If the original owner had already reached their RMD age, RMDs must be taken based on whichever is longer: the eligible designated beneficiary’s life expectancy or what would have been the original owner’s remaining life expectancy. Minor children can take RMDs based on their life expectancy and then distribute the account within 10 years after age 21.

Designated beneficiaries are generally subject to the 10-year rule

If you are a designated beneficiary but not the spouse of the original account owner, you cannot roll the assets into your own traditional IRA. Your options are to take a lump sum payment or open an inherited IRA and follow what’s known as the 10-year rule. This requires you to distribute the entire account within 10 years of the original owner’s death.

If the original owner passed away after starting their RMDs, you must continue to take an RMD every year and then distribute the entire account by December 31 of the 10th year. If the original owner passed away before they were required to begin RMDs, you don’t have to take annual RMDs, but you must still distribute the entire account within 10 years. That means any amount can be withdrawn at any time as long as the full amount is withdrawn by the 10th year.
 

The rules for inherited Roth IRAs are essentially the same as inherited traditional IRAs. The difference is that you typically don’t have to worry about including the distributed amounts as taxable income when withdrawing the money since these are after-tax accounts and withdrawals are generally tax free (as long as the original owner’s Roth IRA has been held for at least five years). However, even though Roth IRAs are not subject to RMDs, inherited Roth IRAs are. Also keep in mind that since the money in an inherited Roth IRA can continue to grow tax free, keeping the money invested and taking RMDs as required may be beneficial.

So if you are a surviving spouse, you can avoid the RMDs altogether by rolling over your deceased spouse’s Roth IRA to a Roth IRA of your own. And if you’re not a spouse and the original owner had not yet started taking RMDs, you could wait to fully distribute the account until the end of the 10-year period.
 

With inherited employer-sponsored retirement accounts such as 401(k)s, 403(b)s and 457(b)s, the rules are similar, but there are a couple differences. The most important is that the account is not only subject to the RMD rules but also the rules of that particular retirement plan. Some plans may require you to move the money out of the plan, while others may have in-plan options for inherited accounts. You can check with the retirement plan provider to get the details.

Spouses have an added option

As with IRAs, if you’re a surviving spouse, you can generally roll over inherited money from an employer-sponsored retirement plan to your own employer-sponsored retirement plan or a traditional IRA and follow the regular RMD rules for those accounts. You can also move the money into an inherited IRA, with the same rules noted above, including no penalties for early withdrawals.

As of 2024, spouses have a third option. The new rule, if offered by the retirement plan, allows you to keep the original retirement account in the name of the deceased spouse and take RMDs according to the deceased spouse’s timetable. You may also get a more favorable RMD calculation (using the Uniform Life Table) than what’s typically used by beneficiaries (the Single Life Table). This is an added benefit if you are older than the deceased spouse.

Designated beneficiaries are generally subject to the 10-year rule

If you are a designated beneficiary but not the surviving spouse, the 10-year rule generally applies to inherited money from employer-sponsored retirement plans. Some plans allow “in-plan” inherited accounts, but the money can be rolled over into an inherited IRA for easier administration. If kept in the plan, the same single life expectancy or 10-year rule applies as with inherited IRAs, depending on your beneficiary status and whether the original owner had started taking RMDs.

RMD rules are complex. The most important factors to keep in mind are:

• Know the deadlines for RMDs on your inherited account(s) to avoid penalties.

• Consider the tax implications of your options.

• Create an RMD strategy, which may help save money, especially for spouses who have the most options.

• Talk to the financial provider of the account(s) for the specific rules that apply in your situation.

After you’ve inherited an account, be sure to designate your own beneficiaries. That will help ensure your wishes are clear and enable a smoother transition for your loved ones if anything happens to you. You should also review the investments to ensure they’re aligned to your long-term financial goals.

For specific questions regarding your situation, speak with a tax professional or contact your Corebridge financial professional. Reach out to us if you don’t have an assigned financial advisor.
 

This material is general in nature, was developed for educational use only, and is not intended to provide financial, legal, fiduciary, accounting or tax advice, nor is it intended to make any recommendations.

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