Inheriting an IRA can feel overwhelming, especially with the IRS's rules around Required Minimum Distributions (RMDs). But no need to stress! We’ll walk you through the process step-by-step to help you understand how to calculate your RMD and keep things on track with the IRS. By mastering this, you’ll avoid unnecessary penalties and manage your inherited IRA smoothly.

What is an Inherited IRA RMD?

An Inherited IRA RMD is the minimum amount you need to withdraw each year from the inherited IRA. The IRS requires these distributions to ensure the funds are eventually taxed. Missing these withdrawals can result in penalties, so it’s important to understand how they work.

Let’s break it down: The IRS wants you to take money out of the IRA every year to collect taxes on it. The amount depends on factors like whether you’re the spouse or a non-spouse beneficiary, and when the original owner passed away. Knowing these factors is key to calculating your RMD accurately.

Key Factors Impacting Your RMD Calculation

Before diving into the math, here’s what you need to know about the factors that influence your RMD:

1. Your Relationship to the Deceased: Rules vary depending on whether you’re the spouse, non-spouse, or trust beneficiary. Spouses have more flexibility, including the option to roll the IRA into their own.
2. Type of IRA: If you inherit a traditional IRA, you’ll be required to take RMDs, while inherited Roth IRAs require beneficiaries to take distributions, even though Roth IRA owners didn’t during their lifetime.
3. The SECURE Act 2.0: Passed in 2022, introduced significant changes for non-spouse beneficiaries. Non-spouse beneficiaries are now generally required to withdraw the entire balance of the inherited IRA within 10 years of the original owner’s death. If the original owner had already started taking RMDs, beneficiaries must also take annual RMDs during this 10-year period (Retirement Plan Distributions after SECURE 1.0 and SECURE 2.0).

Steps to Calculate Your Inherited IRA RMD

Now that you know the rules, here’s a simple guide to calculate your RMD:

1. Determine the Account Balance

Start by finding the balance of the inherited IRA as of December 31st of the previous year. This amount will be used as the starting point for your RMD calculation.

2. Find the Life Expectancy Factor

Use the IRS’s Single Life Expectancy Table to find your life expectancy factor. This is the number you’ll divide the account balance by to calculate the RMD. Your factor decreases each year as you age, reflecting how long the IRS expects the funds to last.

3. Calculate the RMD

Now that you have both the account balance and your life expectancy factor, it's time to calculate your Required Minimum Distribution (RMD). To do this, simply divide the account balance by the life expectancy factor. For example, if the inherited IRA balance is $200,000 and your life expectancy factor is 38.8, the calculation would look like this:

$200,000 ÷ 38.8 = $5,155.67

This means you would need to withdraw at least $5,155.67 this year to meet IRS requirements. Keep in mind, this is the minimum amount required—you can always withdraw more if needed, but this ensures you avoid any penalties.

4. Adjust for Subsequent Years

Each year, subtract one from your life expectancy factor to calculate the new RMD. For example, in year two, use 37.8 instead of 38.8.

Special Considerations for Spouses

If you are the spouse of the original IRA owner, you have additional options when it comes to inherited IRA RMDs:

• You can roll over the inherited IRA into your own name and delay RMDs until you reach age 73 (or 75 starting in 2034).​ [IRS, page 18]
• Use the Single Life Expectancy Table: Alternatively, you can keep the IRA in the original owner’s name and take RMDs based on your own life expectancy, which might make sense if you’re younger than your spouse.

Hypothetical Example: Calculating RMD for an Inherited IRA

To illustrate how these calculations work in practice, let’s walk through a step-by-step example.

Meet Lisa

Lisa, a 40-year-old non-spouse beneficiary, inherits her uncle’s traditional IRA worth $150,000. Since Lisa is not the spouse of the original owner, she is required to begin taking Required Minimum Distributions (RMDs) in accordance with IRS rules.

Step 1: Checking the Account Balance

Lisa’s first step is to check the balance of the inherited IRA as of December 31st of the previous year. In her case, the account balance is $150,000.

Step 2: Finding the Life Expectancy Factor

Next, Lisa needs to refer to the IRS Single Life Expectancy Table. Since Lisa is 40 years old, her life expectancy factor is 45.7. This number represents the number of years over which the IRS expects Lisa to distribute the account’s funds.

Step 3: Calculating the RMD

Now, Lisa can calculate the minimum amount she needs to withdraw for the current year. To do this, she divides the account balance by her life expectancy factor. The calculation looks like this:

$150,000 ÷ 45.7 = $3,282.28

Therefore, Lisa must withdraw at least $3,282.28 from the account this year to avoid IRS penalties.

Step 4: Adjusting for Subsequent Years

In each subsequent year, Lisa will need to repeat this process, but with one change: her life expectancy factor will decrease by 1 each year. So, in the second year, instead of using 45.7, she will use 44.7 to calculate her RMD. This adjustment continues every year, gradually reducing the life expectancy factor as the account balance is drawn down.

Penalties for Missing an RMD

If you fail to take the RMD from an inherited IRA, you could face a penalty of 25% of the amount that wasn’t withdrawn. However, under SECURE Act 2.0, if the RMD is corrected within two years, the penalty can be reduced to 10% [IRS, page 17].

Tools and Resources to Help with RMD Calculations

Managing inherited IRAs can feel complicated, but there are plenty of tools available to make the process easier. Many financial institutions provide online RMD calculators that allow you to quickly figure out the amount you need to withdraw. Typically, these calculators will ask for the account balance, your age, and the date of the original owner’s death to give you an accurate result.

However, if you prefer to calculate it yourself, you can use the following formula:

Account Balance ÷ Life Expectancy Factor = RMD

It's straightforward and gives you control over the process.