Q: Back in 2013, I inherited my younger brother’s IRA. He was 73 when he died. I was 6 years older than him. Since 2014, as advised by my bank, I’ve taken out my required minimum distributions (RMD) based on my life expectancy, not his. However, this year my bank has calculated my RMD based on my brother’s life expectancy, not mine. Can you clear this up for me?
A: You’ve presented a rather interesting case. The quick answer is your bank is now finally giving you correct advice regarding your required minimum distribution or RMD. I emphasize the word, finally, because for the past 9 calendar years you’ve distributed and paid tax on more than was required. This is both unfortunate and irreversible.
To start, the rules did change in 2020 for many IRA beneficiaries. Prior to 2020, non-spouse IRA beneficiaries were allowed to “stretch” their RMDs over their life expectancy. After 2020, most non-spouse IRA beneficiaries are now forced to distribute their inherited IRA balance within 10 years.
Since your brother died in 2013, you get to keep using the old “stretch” rules. At first blush, the bank would appear correct in using your life expectancy to calculate your RMD. However, there was an added wrinkle that your bank overlooked. Given that your brother had already begun taking his required minimum distributions each year, your subsequent Inherited IRA distributions should have been based on his younger age, not yours.
Let me demonstrate the impact. Since he was 73 years old at the time of his death, his life expectancy using the IRS’s life expectancy table (which was updated in 2021) was 16.4 years. The rule states that for all subsequent years, you need to subtract 1 year from his original life expectancy and then divide each year-end account balance by that adjusted life expectancy figure.
For 2014, your first divisor should have been 15.4 or one less than his original life expectancy of 16.4. Now, fast forward all the way to 2023. Your RMD this year should be calculated as your 2022 year-end account balance divided by 6.4, which is now ten less than his original life expectancy. Yes, this is a hefty 16% of your account, but it’s much better than being forced to distribute a truly massive 35% of the account using your age. In the end, I’m very glad the bank is now getting it right.
For interested readers, you can review the Inherited IRA distribution rules on page 10 of the IRS Publication 590-B or by visiting www.FrontStreet.com/InheritedIRA. This link will automatically forward you to an IRS page that does a good job of explaining the rule.