If you have inherited an IRA you are required to begin taking distributions from the account according to a set schedule. If you are the sole beneficiary of the IRA, how you handle your distributions is up to you. If there are two or more beneficiaries of the IRA, the process becomes more complicated – see the article at the link for more on multiple beneficiary arrangements.
There are actually two different schedules that you can use, lifetime distributions and a distribution over 5 years.
The 5-year distribution method is the default period for distribution of an inherited IRA. As the name of the method suggests, in this method the inherited IRA must be completely withdrawn within 5 years of the death of the original owner. There is no specific amount that must be withdrawn in any particular year, as long as the entire account is withdrawn within 5 years.
I mentioned that the 5-year method is the default – this is because if no distributions are taken within the first year following the death of the original owner, it is assumed that the 5-year method is being used. However, if you are using the lifetime distribution method, you would take a specific distribution (or more) during the first year following the year of the death of the original owner.
If using the lifetime distribution method, you are intending to extend the time period of distribution for some length of time in excess of the default 5-year distribution. To accomplish this, there is a specific amount which must be withdrawn each year – and as long as at least that amount is withdrawn annually, the required minimum distribution has been satisfied.
The amount of the withdrawal required each year is determined by the age of the beneficiary upon the death of the original owner. The IRS has a table, known as Table I, that indicates a life expectancy figure for the beneficiary.
So if the beneficiary is, for example, 28 upon inheriting an IRA her life expectancy figure is 55.3. If the inherited IRA is worth $240,000, dividing the value of the IRA by 55.3 results in $4,339.96 – this is the first year’s required distribution. As long as at least that amount is withdrawn during the first year following the year of the death of the original IRA owner, the RMD has been satisfied.
The following year, the original life expectancy figure is decreased by 1 to 54.3. So now, if the IRA is worth $236,000 as of the end of the prior year, dividing that amount by 54.3 results in a RMD of $4,346.22.
The inheritant can take a larger distribution at any time – the only requirement is that at least the prescribed amount is withdrawn every year.