Your client inherits her father's $800,000 traditional IRA. She asks how long she has to empty it. The answer depends on five words: eligible designated beneficiary status. Get the classification wrong and she faces a 25% excise tax on every missed distribution.
Tax-deferred accounts exist on a government IOU: you skipped tax on the way in, so Treasury wants the revenue back on a schedule tied to your life expectancy. Required minimum distributions (RMDs) are that schedule, a forced drawdown designed to tax the account down to zero over your remaining years.
You must start taking RMDs from tax-deferred accounts at age 73. If you were born in 1960 or later, that age rises to 75 (effective 2033). Your first RMD is due by April 1 of the year after you reach the applicable age. Every RMD after that is due by December 31.
The calculation is simple. Take the prior-year December 31 balance. Divide by the Uniform Lifetime Table factor for your age.
Common mistakes
- 10-year rule timing. Candidates assume the non-EDB can let an inherited IRA sit untouched for a decade. When the original owner died after the required beginning date, annual distributions are required during the 10-year window. Missing them triggers the 25% excise tax.
- TRAP: $0 as the annual distribution for a non-EDB is correct only if the original owner died before the required beginning date.
- Age-55 exception scope. The exception applies to the employer plan only. It requires separation from service during or after the calendar year you turn 55. Rolling to an IRA destroys it.
Bottom line
- RMDs start at 73 (75 for those born 1960+): prior-year 12/31 balance ÷ Uniform Lifetime Table factor.
- 10-year rule: non-EDB beneficiaries must empty inherited accounts within 10 years; annual distributions are required if the owner died after the RBD.
- Five EDB categories: spouse, minor children of the decedent, disabled, chronically ill, and beneficiaries within 10 years of the owner's age.
- SEPP (72(t)) must continue the longer of five years or until age 59-1/2; modification triggers retroactive penalties.
Exam shortcut
Non-spouse, non-disabled, non-chronically-ill, non-minor-child, not within 10 years of age → 10-year rule. Employee separating from service at 55+ with funds in the employer plan → penalty-free under the age-55 rule. Employer stock with a low cost basis in a qualified plan → NUA. High-income earner with large pre-tax IRA balances attempting a backdoor Roth → pro-rata rule is the obstacle.
The full lesson (about 2,850 words, 19 min read) adds 2 worked examples, all 7 common mistakes, a self-check, free in the app.
Learning objectives
- F.51
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