The IRS (Internal Revenue Service) makes it mandatory for every IRA (Individual Retirement Accounts) holder to start withdrawing from their account once they turn 72 and a half years old, regardless of whether they want to withdraw it. However, in popular cases, the account holder dies before they can withdraw assets. When such happens, the IRA is inherited, and the funds will be transferred to the beneficiary. However, some rules guide the withdrawal and management of an inherited IRA.
Inherited IRA or Beneficiary IRA is the account where the assets inherited from a deceased IRA are transferred. All inherited IRA must be depleted within the first 10 years of inheritance. According to the SECURE Act (Setting Every Community Up for Retirement Enhancement Act), every inherited IRA must be withdrawn and depleted within 10 years of the original IRA owner’s death. Now, there are many controversies and confusion about how the withdrawal should be done within the stated period. In this post, we will be sharing how the IRS interpreted the depletion of every inherited IRA within 10 years of the original owner’s death.
Inherited IRA Withdrawal Issues
Usually, there is a required minimum distribution for every IRA holder. This Required Minimum Distribution, or RMD, is the funds that every IRA account holder or entitled retiree must withdraw or begin to withdraw at a certain age.
Now, if the IRA owner dies before the first starting date of the annual RMD, the beneficiary that inherits the IRA doesn’t have to evenly withdraw the funds within 10 years of the original owner’s death. They can choose to withdraw the funds annually, in two years intervals, or even at the end of the 10 years. However, what is most important is that the inherited IRA must be depleted in 10 years.
In the same vein, if the original IRA owner dies after the starting date of the annual RMD, the account’s beneficiary must withdraw the annual RMD in the same manner the original account owner did. This will be done from the 1st year of the original account owners’ death until the 9th year. And if by the 10th year, the IRA is not depleted, the beneficiary must withdraw the balance in the inherited IRA to their account.
In conclusion, the annual RMD in every inherited IRA must be withdrawn and depleted within 10 years of inheriting the IRA. Suppose the beneficiary of the IRA does not deplete the account within the stated period. In that case, the IRS will take 50% of whatever is left in the inherited IRA as penalty tax.