How do I model distributions from Inherited IRAs and retirement accounts?

The rules surrounding how someone can or must distribute funds from an inherited IRA or retirement account are complex. This article summarizes the rules for distributions and shows how to include inherited account distributions in an Income Lab plan.

For more on these rules, see Kitces.com.

Types of Beneficiaries

Designated Beneficiary

Any individual named under the plan/IRA (confirmed by Sept 30 of the year after death). Must be a person; entities don’t qualify. If a trust qualifies as “see-through trust,” the trust’s individual beneficiaries are treated as the Designated Beneficiaries.

Non-Designated Beneficiary

A beneficiary that is not an individual. For example, an estate, charity, or certain trusts that don’t meet see-through rules. For Non-Designated Beneficiaries, the payout window depends on whether death was before or after the owner’s RBD (5-year rule vs. “ghost life” using the owner’s remaining life expectancy).

Eligible Designated Beneficiary

A Designated Beneficiary who, on the date of death, is: (1) the surviving spouse; (2) the child of the decedent who hasn’t reached the age of majority (age 21 under the final regs); (3) disabled; (4) chronically ill; or (5) not more than 10 years younger than the decedent. Minor-child status ends at majority, after which a 10-year clock applies (unless the child is also disabled/chronically ill and properly documented).

Non-Eligible Designated Beneficiary

Any other designated beneficiary, such as adult children of the deceased. Typically limited to the 10 Year Rule. If death was on or after RBD, will have to take Life Expectancy RMDs in years 1-9 after death as well.

Spouse

The decedent’s spouse. Spouses are Eligible Designated Beneficiaries but also have other special options such as treating the account as their own or keeping it as an inherited account and using the owner-style Uniform Lifetime Table (Table III) when sole beneficiary. They can also defer starting until the year the decedent would have hit RMD age if death was before the RBD.

Distribution Methods

There are several ways someone can distribute inherited accounts. The availability of these methods depends on the nature of the beneficiary. Availability of these methods is covered below, but this list defines each method. For each method, if there was an RMD due in the year of death, that RMD must be taken using the deceased’s rules. (If you're entering an inherited account in Income Lab, the balance would typically exclude this final decedent RMD, since that RMD is taxable on the decedent's final tax return.) The years discussed below refer to calendar years beginning in the year after death. 

RMDs and RBDs

In the table below regarding how heirs need to take distributions from inherited accounts, you will see the term RBD and RMD. RBD is the original owner's (the decedent's) "Required Begin Date". A Required Begin Date is the date Required Minimum Distributions (RMDs) begin, typically now the year someone turns age 73 or 75. Here is a complete guide to RMD age/RBD:

Note that, although the first RMD can be delayed until April 1 of the year following the crucial year, if someone does delay taking that first withdrawal they will still also need to take a withdrawal for that same year. So, if the first RMD is due for 2025, it can be taken in 2026 (if before April 1), but it would be based on the 2025 balance. In 2026 there would be another RMD due for that year that needs to be taken before the end of 2026.

Beneficiary Types and Available Distribution Methods

Note that if the account is a Roth IRA or the deceased’s “entire interest” in the plan is in a Designated Roth account, the account will be treated as having been received before RBD (since there is no RBD for Roth accounts).

The table above does not include the Spousal Rollover option, which is always available to a spouse. However, if a spouse delays moving the inherited account into their name after their own RBD, they have to make up any RMDs they would have had to pay had they rolled the account over earlier. These are called “Hypothetical RMDs”.

How to Include these Distribution Methods in an Income Lab Plan

An inherited IRA/Retirement Account, whether it is Roth or traditional, and inherited non-qualified annuities, all include the option to specify account-specific distribution plans. To access these options, click on “Distribution Settings” in the side-bar for the account. You can access the side bar by clicking on the account in Life Hub or by clicking on the “gear” icon next to the account in the plan stepper.

For inherited accounts, you will typically be using the “Stretch” distribution option and specifying the years over which the account will be distributed.

Below are specific instructions for entering each distribution method discussed above.

How to Enter Distribution Methods

Life Expectancy (IRS Table I, Eligible Designated Beneficiaries)

Using IRS Table I (the Single Life Expectancy Table) look up the life expectancy of the younger of the beneficiary or the deceased at the age of death.

Find the end of this life expectancy period from January of the year after death. For example, if the life expectancy is 14.8 years because the deceased died at age 75 in August 2023, the end year 2024 + 14.8 = would be 2038.

Enter a distribution plan using the “Stretch” method beginning now and ending at the end of the life expectancy (e.g., in 2038).

Spouse “Treated as Decedent” with IRS Table I

Using IRS Table I (the Single Life Expectancy Table), look up the life expectancy of the deceased at the age of death.

Find the end of this life expectancy period from January of the year after death. For example, if the life expectancy is 14.8 years because the deceased died at age 75 in August 2023, the end year 2024 + 14.8 = would be 2038.

Enter a distribution plan using the “Stretch” method beginning now and ending at the end of the life expectancy (e.g., in 2038).

Spouse “Treated as Decedent” Method with IRS Table III

This method is not yet covered in Income Lab. However, we plan to cover this method in the following way: Choose the “Table III” distribution method from the Distribution Methods drop-down menu. This will ensure that the surviving spouse’s own age will be used and that Table III distribution factors will be used.

Enter the correct beginning date for the distributions (typically the date when the deceased’s RBD).

Do not choose this when Spouse “Treated as Decedent” with Table I should be used.

10 Year Rule with RMDs in Years 1-9

Using IRS Table I (the Single Life Expectancy Table), look up the life expectancy of the deceased at the age of death.

Find the end of this life expectancy period from January of the year after death. For example, if the life expectancy is 14.8 years because the deceased died at age 75 in August 2023, the end year 2024 + 14.8 = would be 2038.

Enter a distribution plan using the “Stretch” method beginning now and ending at the end of the life expectancy (e.g., in 2038). This will ensure proper withdrawals in years 1-9.

The final lump sum for this method is not yet covered by Income Lab. However, we plan to introduce a new option in which you will check the “Distribute entire balance in ___” box in the Distribution Plan dialogue box and choose the correct year for the 10^th year after death. (If the 10-year period began in past year, that might not be 10 years from today!)

“Ghost Life” Method

Using IRS Table I (the Single Life Expectancy Table), look up the life expectancy of the deceased at the age of death.

Find the end of this life expectancy period from January of the year after death. For example, if the life expectancy is 14.8 years because the deceased died at age 75 in August 2023, the end year 2024 + 14.8 = would be 2038.

Enter a distribution plan using the “Stretch” method beginning now and ending at the end of the life expectancy (e.g., in 2038).