Successor Beneficiary of Inherited IRA Rules

Understanding the New RMD Rules for Non-Spousal Beneficiaries of Inherited IRAs - Part IV

Ed Zurndorfer - This is the fourth of a series of FEDZONE columns discussing the changes to the required minimum distribution (RMD) rules for non-spousal beneficiaries of inherited IRAs. This column presents three topics:

Payout requirements when a successor beneficiary inherits from the deceased original beneficiary.
Whether a qualified charitable distribution (QCD) can be done from an inherited IRA, and
Whether an inherited IRA can be moved into a beneficiary’s own IRA and whether an inherited IRA needs to be considered when applying the ‘pro-rata” rule.

Payout Requirements When a Successor Beneficiary Inherits from the Original Beneficiary

Under SECURE Act 2.0, a successor beneficiary (that is, the beneficiary of the originally named beneficiary of the inherited IRA) is subject to the 10-year rule. It makes no difference if the successor beneficiary is a spouse, is disabled, or could otherwise qualify as an eligible designated beneficiary (EDB).

The 10-year period will either be a new 10-year period or the continuation of an existing 10-year period. If RMDs were being taken by a previous account owner annual RMDs within the 10-year period are required by the successor beneficiary.

The following inherited IRAs scenarios are presented together with examples that will illustrate:

Scenario 1. The originally named beneficiary was an EDB and “stretching” RMD payments over his or her single life expectancy.

In this scenario, the successor beneficiary will get the benefit of a full 10-year payout period. RMDs will apply in years 1 through 9, based on the original beneficiary’s single life expectancy. The successor beneficiary will essentially “step into the shoes” of the original beneficiary and continue the same RMD schedule, for years 1 through 9 using the same RMD factor, minus one each year. The following example illustrates:

Example 1. Jerry owned a traditional IRA and named his wife Francine as his sole beneficiary. Jerry died at age 69. Francine was age 63 at the time of Jerry’s death on July 15, 2020. Francine as an EDB elected to “stretch” her inherited IRA from Jerry over her life expectancy. Shortly after inheriting Jerry’s traditional IRA, Francine named a successor beneficiary, their son Randolph. Francine’s first RMD payment was due by December 31,2021. The RMD was based on: (1) The inherited IRA balance as of December 31,2020 and (2) Francine’s single life expectancy factor for a 64-year-old, since Francine became age 64 during 2021. According to Table 1 (Single Life Expectancy, found in Appendix B of IRS Publication 590-B), the single life expectancy factor for a 64-year-old is 23.7. Francine received that RMD in November 2021. She suddenly died on March 10, 2022. As successor beneficiary, Randolph will be required to withdraw the balance in the inherited IRA by December 31 of the 10^th year following the year of death of Jerry. That is, no later than December 31, 2030. RMDs will be required during years 1 through 9. Randolph will “step into the shoes” of his deceased mother Francine and continue the same RMD schedule. For years 1 through 9, Randolph will use Francine’s RMD factor minus one.

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For year 3 (2023), Randolph will calculate that year’s RMD as follows:

Inherited IRA balance as of December 31, 2022
Life expectancy factor is 22.9 (Francine’s life expectancy factor in 2022, the year she died) less 1, equals 21.9.

For year 4 (2024), Randolph will calculate that year’s RMD as follows:

Inherited IRA balance as of December 31, 2023
Life expectancy factor is 21.9 (Francine’s life expectancy factor in 2022, the year she died) less 1, equals 20.9.

For years 5 (2025) through 9 (2029), Randolph will calculate his RMD using the same procedure.

During year 10 (2030), Randolph will be required to withdraw the remaining balance in the inherited IRA no later than December 31, 2030

Scenario 2. Original beneficiary was already using the 10-year rule.

If the original beneficiary of the inherited IRA was already using the 10-year rule, then the successor beneficiary has to continue the remaining time on that same 10-year period. There is no “reset” of the 10-year period. If the original beneficiary was not subject to RMDs during the 10-year period, then the successor beneficiary need not take RMDs. The following example illustrates:

Example 2. Peter was the owner of an inherited IRA when he died April 30,2020 at the age of 67. Peter had named his daughter Gloria as the sole beneficiary of his inherited IRA. At the time of Peter’s death Gloria was 42 years old and was therefore a “non-Eligible Designated Beneficiary” (NEDB) subject to the 10-year payout rule. Shortly after inheriting Peter’s inherited IRA, Gloria named her son Frank (age 19) as a successor beneficiary of her inherited IRA.

Gloria was subject to the 10-year payment rule with the inherited IRA to be paid out no later than December 31, 2030. Gloria took her first distribution from the inherited IRA in 2021. Since Peter died before reaching his required beginning date, Gloria was not subject to RMDs during the 10-year payout schedule.

Unfortunately, Gloria suddenly died on August 14, 2022. Frank, the successor beneficiary of the inherited IRA must complete the payout of the inherited IRA no later than December 31, 2030, the same deadline as Gloria.

If RMDs were being taken by the original beneficiary, then the successor beneficiary must continue the same schedule for the remainder of the 10-year period.

Qualified Charitable Distribution and Inherited IRAs

A qualified charitable distribution (QCD) is a distribution from a traditional IRA to a qualified charity. A QCD is not taxed and therefore not included in the traditional IRA owner’s taxable income. The IRA owner must be age 70.5 or older in order to make a QCD. If certain conditions are met, QCDs can count toward the RMD requirement that traditional IRA owners are subject to once they have reached their required beginning date (age 70.5., 72, 73 or 75 depending in which year they were born).

The question is: Can a QCD be made from an inherited IRA? The IRS says yes, a QCD can be made from an inherited IRA. However, this assumes that the standard QCD rules still apply. This means that the current inherited IRA beneficiary must be at least age 70.5 to qualify. It is not good enough that the deceased original IRA owner was past age70.5 at the time of death. The following example illustrates:

Example 3. Ivan died at age 76 and named as his traditional IRA beneficiaries his younger siblings Carol, age 74, and Sheldon, age 68 (each sibling is a 50 percent beneficiary). Only Carol can make a QCD from her inherited IRA. Sheldon will have to wait until he is age 70.5 to make a QCD from his inherited IRA.

Does an Inherited IRA Have to be Considered When Applying the IRA “Po-Rata” Rule?

Inherited IRAs are disregarded when applying the “pro-rata” rule to a beneficiary’s or a successor beneficiary’s own IRAs (as is the case with the Thrift Savings Plan for federal employees, and 401(k) or 403(b) qualified retirement plans for IRA owners who work in private industry).

The pro-rata rule dictates that all lifetime traditional IRA accounts, including SEP-IRAs and SIMPLE IRAs, must be considered in order to properly calculate taxes on certain IRA transactions, such as Roth IRA conversions. Moving a nondeductible traditional IRA (in which the contributions were made with after-taxed dollars) into a separate IRA does not allow those IRA funds to avoid being included for the purpose of the “pro-rata” rule.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.