This article is accurate to the best of my knowledge, but you are responsible for verifying the information before using it.
RMDs: Implications
These three points might not be obvious:
- The Single Life Expectancy table always produces a smaller life span factor (i.e., less remaining years) than the Uniform Life or Joint Life and Last Survivor Expectancy tables.
- This is due to the Single Life Expectancy table showing a single life span, and the second two are based on the combined life spans of two people. (You will notice that the uniform life factors are identical to joint life factors for a spouse exactly 10 years younger.)
- You use the Uniform Life table, even if you are single.
- An account owner will never be required to fully empty their account because their life expectancy factor is never 1.0 or less. (If you live long enough, not much will be left.)
- An inheritor will be required to empty the inherited account because their life expectancy is calculated once and counts down to zero.
Why do you care?
- Your own IRA has smaller RMDs that an inherited IRA for the same age.
- Your own IRA never has to be fully depleted.
- Using the age of a younger spouse will not give a higher life expectancy than the joint life table.
- Using the age of a younger spouse will give a closer life expectancy to the joint value
- Using the age of a younger non-spouse might give a higher life expectancy
Inheritance Options: Clarification
Yeah, the inheritance rules are confusing. The IRS overview page gives limited information on what the rules mean, and it provides no information about why you might choose one option versus another. Some of the financial institution pages are quite helpful, but they each contain a different useful piece of the information.
In reality, everyone, except the spouse, has very limited options. If the account holder was past their required beginning date, even the spouse has limited options too. Despite the confusing wording, there are only a few total options available to anyone:
- Defer taking distributions until the account holder would have reached their required beginning date
- Take distributions over a life expectancy
- Follow the 10-year rule
- Rollover the inherited Traditional IRA into their own IRA
Defer Distributions
This option can be used by the spouse of the account owner to defer taking RMDs from an inherited IRA, until the original account owner would have reached their required beginning date. Once the required beginning date is reached, the spouse must take RMDs based on the their own life expectancy. If the account holder was younger, this can push back the year you need to take RMDs, but the RMDs will be larger because you are older. At this point, the spouse can roll the inherited IRA into their own IRA. This can be useful because the RMD of a non-inherited account is smaller, and a non-inherited account does not have to be emptied.
For example, Jack died at 65, but Jill was 75. (She was a silver cougar.) If Jill rolls the inherited IRA into her IRA, she will have to take RMDs from his IRA funds. Instead, Jill can defer taking RMDs for 8 years, until Jack would have been 73. At this point, she would have to take RMDs base on her life expectancy. RMDs on her life expectancy from the inherited IRA will be higher than RMDs on her own IRA, so she should roll the inherited IRA into her own IRA.
Take Distributions Over a Life Expectancy
This post here has details about how to do this calculation. The basics are that you perform a single calculation of how many years the target person would be expected to have left at the age they would be next year. Your RMDs are the December 31 balance of the previous year divided by the number of years left. The number of years left decreases by 1 per year. This systematically empties the account over the life expectancy number of years. The life expectancy value is based on the age of the target individual, even if that individual has passed away.
It is always in your best interest to use the lowest age you are allowed to use for calculating RMDs. A lower age results in lowed RMDs and more flexibility on when the funds are removed.
10-Year Rule
This rule requires you to empty the account within 10 years. If the account owner distributed RMDs, you will have to distribute RMDs, for your age. Unless you are in your 80’s, you will need to distribute more than your RMD to avoid a larger lump sum distribution at 10 years.
Rollover
This option is available to the spouse, and the spouse puts the inherited IRA funds into their own Traditional IRA. If the spouse is not 59 ½, there is an additional 10% federal penalty tax on any distributions. The inherited IRA does not have a penalty for distributions, even for a spouse under 59 ½. If the spouse is 73 or older, they will have to take RMDs based on the Uniform Life table.
Prev: The Rules
Next: What to Do?