The Inherited IRA RMD

Mickey | Financial | Friday, January 7th, 2011

A person’s inheritance can take on several forms. They can be in the form of money, or a plan that regularly “dispenses” money, such as an IRA, or individual retirement account. This is an account that in which the deceased person had regularly made contributions to during his or her lifetime, supposedly to be used as retirement funds. The RMD, or required minimum distributions, is an integral concept of inherited IRAs. Basically, it is the minimum amount of money that the beneficiary of the IRA is forced to withdraw every year from the account.

The main reason of the inherited IRA RMD is for tax purposes. This is so because theoretically, one can simply accumulate the funds in an IRA, never withdraw it, and then bequeath it as an inheritance when one passes away. Aside from potentially accumulating so much “unused” money, that money cannot be utilized by the government. So to prevent this, the beneficiary of an inherited IRA must withdraw money from an account, and this withdrawal is then correspondingly taxed. The RMD and the tax depend on the value of the accounts at the beginning of the withdrawal year.

The inherited IRA RMD can be computed independently by the beneficiary, and in fact this is encouraged to clarify expectations about and to verify the exact amount that will be received. For this purpose, certain tables, called single life expectancy tables and uniform lifetime expectancy are issued for reference. The exact table to be used depends on the particular situation at hand. A spreadsheet is then prepared and the corresponding values are entered, decreasing the multiplier for each progressive year.

The inherited IRA RMD is required by law. Using the wrong table or failing to take an RMD would result in a penalty, amounting to 50% of the account’s value. This can be very big, and may sometimes require the services of a debt settlement attorney affiliate. Conscientious and careful withdrawals then, is a must.

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