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The Wealth & Wisdom Blog

Information on Estate Planning, Estate and Trust Administration and Unique Asset Planning

Tax-deferred retirement accounts are accounts that allow for investment appreciation and earnings free of any income or capital gains tax until the assets in the account are withdrawn.  Taxes are imposed not when the investment inside such account is sold, or interest or dividends paid, but when the account owner decides to withdraw the assets from the accounts.  The most common types of tax-deferred retirement accounts are Individual Retirement Accounts (“IRAs”), 401Ks, 403(b)s, and SIMPLE IRAs.

Once the original account owner reaches retirement, the account owner is required to withdraw a minimum amount, called the “required minimum distribution” (“RMD”) on an annual basis.  Following the date when the account owner is deemed to be retired, the account owner can withdraw any amount, but must withdraw no less the RMD amount annually.  The withdrawn amount is then subject to ordinary income taxes.

Following the death of the account owner, the remaining retirement accounts are transferred in ownership to the beneficiary or beneficiaries named on the deceased owner’s beneficiary designation.  New accounts are then established in the name of the new account owner.  These accounts take on a slightly different tax treatment, being now characterized as a type of an account called an “Inherited IRA.”

If the new account owner is not an “Eligible Beneficiary,” then the new account owner must withdraw, and pay taxes upon, all remaining retirement account assets in the Inherited IRA within 10 years of the death.  If the new account owner is characterized as “Eligible Beneficiary,” in the year following the original account owner’s death, the new account owner must begin taking RMDS every year.  However, the amount that the new account owner is required to withdraw every year is based upon his or her remaining life expectancy.  Note that the account owner must begin taking RMDs even if he or she has not yet reached his or her own retirement.  Each year thereafter, the new owners of the inherited account must take RMDs from the Inherited IRA using a formula specified by the IRS and based upon the account owner’s life expectancy.

By way of example, if the new account owner is 50 years of age, the new account owner will have a life expectancy of 34.2 years, and the 50 year old owner of an IRA must begin taking annual RMDs based upon that life expectancy.  If this 50 year-old individual were to receive an inherited retirement account worth $1.0 million, the minimum distribution would be $29,240 in the first year.  The new account owner could withdraw a greater amount than $29,240, but the distribution made during the account owner’s 50th year must be at least this amount.  For comparison purposes, here are a few other RMD amounts for various ages, together with the minimum amount based upon a hypothetical inherited IRA account of $1.0M in assets.

Age of Owner                            Divisor:                         RMD on $1.0M

10                                             77.9                              $13,351.14

30                                             55.3                              $18,083.18

50                                             36.2                              $27,624.31

60                                             27.1                              $36,900.37