This article is accurate to the best of my knowledge, but you are responsible for verifying the information before using it.

• Introduction
• The Rules
• What Does that Mean?
• What to Do?
• Appendices
• Short Attention Span

A simplified explanation of the tax policy for a Traditional IRA is listed below. These are generally true, but there are nuances and exceptions to the policies below. This is for Traditional IRAs in general, not specific to inherited Traditional IRAs.

• When you deposit money in a tax-deferred account:
  • the deposited money is not included in federal income taxes, in the year of the deposit.
  • your state may or may not tax the money, when it is deposited. Check your state laws
  • you will need to report that you deposited the money in a tax-deferred account on your income taxes. This will reduce your adjusted gross income (AGI) and taxes due
  • your should not exceed the deposit limits for the current year, your age, your income, and retirement plan. Doing so may result in additional tax penalties
  • it is possible to end up with taxed money in the tax-deferred account due to your income being too high to deduct the deposits
  • you can only deposit earned income (e.g., wages, commissions, etc., but pensions, investment income, etc.)
• Investments in a tax-deferred account:
  • are not taxed for capital gains and dividends earned in the tax deferred account
  • are not taxed for realized gains from sales and exchanges of investments in the tax deferred account
• When you receive distributions from a tax-deferred account:
  • the money is taxed as ordinary income in the year it is distributed (removed) from the account
  • you will need to report the amount distributed from your tax-deferred account when you file taxes. This amount is often listed on a 1099-R form
  • you can request that federal and state taxes be withheld when the money is distributed
    • If you withdraw a large enough amount with no taxes withheld, you will have to pay penalty interest, unless you pay additional quarterly taxes for the withdrawal
    • You can mitigate some of the penalty interest for no taxes withheld by taking your distribution in December, so it will be fewer months of interest for not paying quarterly taxes
  • you pay a federal penalty tax of an additional 10% on distributions before age 59 ½ years old (with a few exceptions)
  • you pay a federal penalty (excise) tax of an extra 50% of your RMD for not taking the Required Minimum Distributions (RMDs), which starts at age 73
• When you pass away and someone inherits your tax-deferred account:
  • The government wants their tax revenue, so there are rules for when the inherited money must be distributed from the IRA
  • A distribution from an IRA can be invested again somewhere else (e.g., Individual Brokerage Account), but you pay taxes on the distribution.
  • Warning: Only the spouse has the option to use the 60-day rollover rule for an inherited IRA rolling to an individual IRA. If a non-spouse transfers an inherited IRA into an individual IRA, the entire balance is a taxable distribution. An inherited IRA is treated as a different account type from an individual Traditional IRA
  • Warning: Transferring an inherited IRA account from one trustee (e.g., investment firm) to another does not allow for a 60-day rollover. Only perform a trustee-to-trustee transfer. If you receive a check from your inherited IRA in your name, expect to pay income taxes for it

The SECURE Act of 2019 and SECURE Act 2.0 included provisions to make retirement savings plans easier for employers to provide and employees to contribute. These also changed how inherited IRAs are handled. Yes, the rules are kind of confusing.

The options available to the inheritor depend on the age of the deceased account owner, age of the beneficiary, relationship of the beneficiary, and several additional caveats. The IRS defined four groups of inheritors:

• Spouse – an individual lawfully married to the original account holder
• Eligible Designated Beneficiary – a beneficiary that is an individual that is:
  • surviving spouse of the deceased account holder that is a sole beneficiary
  • a minor child of the deceased account holder
  • not more than 10 years younger than deceased account holder
  • disabled individual as defined by IRC Section 72(m)(7)
  • chronically ill individual as defined by IRC Section 7702B(c)(2)
• Designated Beneficiary – all other individual beneficiaries
• Non-individual Beneficiary – trusts, business, church, charity, corporation, etc.

In 2024, the required beginning date is the year that the account owner turns 73. The account owner is allowed to defer the first required minimum distribution until April 1st the year after they turn 73. They will pay income taxes on both distributions in the same year. This could significantly increase their income taxes. (Note: In 2022, the required beginning date was the year that the account owner turned 72.)

The 10-year rule says that the account must be emptied of funds by the end of the tenth year following the account owner’s death. For the general case, the money does not have to be removed until the last year. If the deceased account holder took RMDs, designated beneficiaries also have to take RMDs based on their life expectancy. An investment provider may show your next year’s RMD on the end of year statement (i.e., 2024 end of year statement lists the 2025 RMD).

If you are still working, the updated laws say that RMDs do not have to begin at 73 years old. Without legal clarification, I would assume that dying after 73 while still working falls into the “after required beginning date”.

The RMD rules work one way for account holders and another way for inheritors. This is important for why you chose one option or another. The post on this page goes into details and examples, so this will be a bit briefer.

If you are the account holder, your life expectancy is determined every year, once you reach your required beginning date (73). You look up your age (and spouses age) in a life expectancy table – Uniform Life or Joint Life and Last Survivor Expectancy table. These tables list the expected combined remaining life of you and a spouse at specific ages. Each year, your RMD is the account balance on December 31 of the last year divided by your life expectancy this year. Each year longer that you live results in less than a 1 year reduction in remaining life. At 115 years old, the smallest life expectancy is 1.9 years, which is taking a little more than 50% of the balance. For example, at 70, you should live 27.4 more years. At 71, you should live 26.5 years. That is only a 0.9, so you are expected to live 0.1 years longer at 71 than 70.

If you are an inheritor, your life expectancy is determined once in the year the account holder passed away. In Single Life Expectancy table, you lookup your age on your birthday in the year after the account holder’s death. The value at that age is your life factor; your expected remaining years of life or life expectancy. Your RMDs start the year after the account holder died, and your life factor decrements by one each year. You will be required to empty the account by the end of the calculated life expectancy. For example, the account holder dies at 74. In that year, the life factor for the RMD is 25.5, based on the account holder’s age. You inherit at age 63, so your life factor is 23.7, based on your age next year – 64. The next year the RMD is based on 23.7. The years after that count down the factor – 22.7, 21.7, … , 1.7, .7.