How to Calculate the Required Minimum Distribution of an Inherited IRA

Calculating the required minimum distribution of an inherited IRA account is a relatively simple matter that involves three steps, and you have some latitude in how the distributions are taken. The cost of noncompliance is steep, so it's worth a little time and attention to make sure you're following the IRS guidelines.

Difficulty: Challenging

Instructions

Things You'll Need:

• Age of the person receiving the benefit
• Spreadsheet program
• IRS guidelines

1. Refer to Internal Revenue Service document 590 for a discussion of the rules and regulations regarding required minimum distributions, or RMD.

2. Create a spreadsheet to compute the minimums due each year (see Resources section).

3. Enter the amount of the inheritance in column one. In column two, enter the age of the beneficiary. In column three, enter the value of the portfolio as of Dec. 31 in the year following the death.

4. Consult IRS document 590, Appendix C, Table 1, and find the factor for the age entered in column two. Enter this in column four.

5. Divide column three by column four, the age factor. The result is the RMD amount. Reduce the factor in column four by one for each succeeding year. Multiply the resulting factor by column three to estimate the RMD for future years.

6. Note that the RMD is only a minimum amount of withdrawal. Withdraw any amount, including the entire inheritance, if desired. Add the actual amount withdrawn as ordinary income tax on the personal return. Pay at the calculated tax rate.

7. Review state laws regarding RMD. Taxes will have to be paid on the amount withdrawn per state tax rates. Realize that if the IRA flows to the marital spouse the withdrawal must still take place but does not create any estate tax. This is not true if the IRA is inherited by any other family member or friend.

Tips & Warnings

• Always consider the use of professional assistance when calculating a new tax structure such as the RMD.
• Consult the Internal Revenue Service or the Form 590 document (Resources, below) with any questions. Failure to withdraw the minimum may result in penalty taxes of as much as 50 percent of the amount not taken.

References

• Avoiding RMD Pitfalls
• Internal Revenue Service Document 590

Resources

• Tax Inheritance Discussion
• Free Spreadsheet Program

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on 12/23/2009 According to the IRS 590 publication, an inherited IRA beneficiary does not need to take a RMD in 2009. FYI