Missed inherited IRA RMD

If you inherited an IRA from a deceased IRA holder, you may be required to take annual Required Minimum Distributions (RMDs) depending on the age when the original IRA holder died. However, sometimes, beneficiaries may miss taking the mandatory distributions, resulting in significant penalties.

If you missed the deadline for taking your required minimum distributions from your inherited IRA, you will owe the IRS an excise tax of 25% of the distribution not taken. If you correct the missed RMD within two years, you will pay a reduced penalty of 10% on the distribution not taken.

Inherited IRA RMD rules 2024

In July 2024, the IRS released final rules clarifying certain rules concerning inherited IRAs. These guidelines focused on certain SECURE Act provisions and actions that beneficiaries must take to comply with inherited IRA rules.

The Secure Act of 2019 introduced the 10-year rule for inherited IRA distributions, which requires most non-spouse beneficiaries to deplete the IRA by the 10^th year of the original IRA owner’s death. Some beneficiaries like minor children and disabled and chronically ill individuals are exempted from the 10-year rule.

Beneficiaries who inherit a Roth IRA are also subject to the 10-year rule. While qualified Roth IRA distributions are tax-free, some beneficiaries are required to deplete the account within 10 years.

If the original IRA owner had started taking RMDs, non-spouse beneficiaries must continue taking annual RMDs during the 10 years. However, if the original account owner had not started taking RMDs or had not attained RMD age at the time of death, there are no annual RMDs during the 10 years, as long as the inherited IRA is emptied by the 10^th year.

Spousal beneficiaries enjoy greater flexibility with inherited IRAs, and they can choose to treat the inherited IRA as their own. This option allows a surviving spouse to roll over the inherited IRA into their IRA, and delay taking RMDs until they reach age 73. They can also choose to keep the inherited IRA and take distributions based on the deceased spouse's age.

What happens if you missed inherited IRA RMD?

If you missed taking an RMD from an inherited IRA, an additional penalty tax will apply. The penalty was 50% of the amount that should have been withdrawn, but the SECURE Act 2.0 reduced the penalty to 25%, also known as excise tax. However, if the error is timely corrected within two years, the penalty will be reduced from 25% to 10%.

For example, if you miss taking a $4,000 RMD, the IRS will impose an additional 25% penalty tax equivalent to $1,000. However, if you correct this mistake within two years, the penalty will be reduced from 25% to 10%, equivalent to $400. If the deadline to take RMDs was missed due to reasonable mistakes, you can request the IRS to waive the additional taxes entirely.

The missed RMD is still considered an income, and you will owe income taxes on the distributions you should have taken. While failing to take RMDs delays tax payments, the outstanding taxes will compound over several years if you miss multiple RMDs.

Taking RMDs from multiple IRAs

If you inherited multiple IRAs, the RMDs rules depend on whether you inherited the retirement assets from the same or different decedents.

If you inherited multiple IRAs from the same decedent, you are allowed to combine RMDs for the multiple inherited IRAs and take the total RMD from one of the inherited IRAs. For example, if Ann inherited two IRAs from her mother Mary, she is required to take RMDs of $6,000 and $5,000 from the two IRAs. In this case, she can combine the two RMDs, and withdraw $11,000 from one of the two IRAs.

If you inherited IRAs from different individuals, you must calculate the RMDs and withdraw RMDs from each decedent’s account. So, if Ana inherited an IRA from her mother and sibling, she must calculate the RMDs for each account and take distributions separately from each inherited IRA. Unlike when IRAs are inherited from the same decedent, Ann cannot combine the RMDs.

Steps to correct missed inherited IRA RMD

If you missed taking RMDs, there are several steps you can take to correct missed Inherited IRA RMD.

Request a waiver

If you missed taking an annual RMD, the first step you should take is to request a waiver from the IRS. You will be required to fill out IRS Form 5329, indicating the missed RMD, and the penalty amount. You must attach a letter of explanation, indicating why the RMD was missed and the steps you are taking to correct it.

Pay excise tax

If the IRS rejects your waiver request, you must pay the excise tax. You can determine the excise tax to pay by calculating 25% of the missed RMD amount and paying the taxes owed using IRS Form 5329. If you are correcting the missed RMD within two years, a reduced penalty of 10% will apply to the amount you should have taken.   

You can file Form 5329 along with your annual tax return, or separately. If you are filing a federal annual tax return (Form 1040), you can attach Form 5329 and pay excise taxes and your regular income taxes.

If you want to file Form 5329 separately, you can mail it to the IRS service center near your location. If you are not sure what IRS center is near your area, you can use the IRS office locator app to get the address.

Withdraw full balance

Once you have paid the excise tax, you should start taking RMDs to avoid future penalties. If your inherited IRA is subject to the 10-year rule, you can decide to withdraw the full balance if you have a few years remaining to the 10^th year, or if you are managing multiple distributions.

Be aware that taking large distributions from the inherited IRA could push you into a higher tax bracket. You can decide to spread distributions over several years to reduce your tax liabilities. If you are over 70 ½, you can decide to make a Qualified Charitable Distribution (QCD) of up to $100,000 per year to a qualified charity. The QCD counts towards your RMD, but it is not considered a taxable income.