• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Wealth Pilgrim

No Money Worries. No Matter What.

Neal Frankle featured in
  • Home
  • Life Insurance
  • Investing
    • Build Strong Investment Building Blocks To Avoid Going Broke In Retirement
    • Systematic Mutual Fund and ETF Investing
    • Stock Market Investing Guide
    • Choosing the Right Investment Brokerage Guide
    • How Bonds Work Guide
    • How Banks Really Work Guide
    • Annuities – What You Need To Know Before You Invest
    • A Beginners Guide To Buying Individual Stocks
    • Create A Pool Of Great Mutual Funds and ETFs To Pick From To Secure Your Retirement
    • ETF and Index Fund Investment Guide
  • Earn More
  • Banking
  • Retirement Planning
    • Retirement Guide
  • Ask Neal a Question
  • Reviews
    • Upgrade Personal Loans Review
    • Lending Club Review
    • Prosper Review
    • Ally Invest TradeKing Review
    • CIT Bank Review
    • LegalZoom Review
    • Lexington Law Review
    • Airbnb Host Review
    • Should You Drive For Uber?
  • Tax
  • Courses
    • Raise Your Credit Score So You Can Buy a House – Free Video Course

Beneficiary IRA Distributions (RMD) – What You Absolutely Must Know

by Neal Frankle, CFP ®, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.

If you have a Beneficiary IRA the chances are very high that your CPA, advisor and/or custodian are setting you up for IRS trouble.  That’s because based on my experience, many professionals do not know how to calculate your Required Minimum Distribution.    I published this post on Beneficiary IRA Distributions about a month ago.  Since then, I’ve uncovered 3 custodian mistakes (from a company that handles hundreds of billions of IRA money).  

No less frightening, I had to explain how the Beneficiary IRA RMD is calculated to no less 4 CPAs that work with my clients.  Take a few minutes.  Read through this post and confirm your own RMD.  It’s simple and shouldn’t take more than 20 minutes tops.  If you have questions – connect with me..  This is too damn important to gloss over.  I want to do whatever I can to make sure good Pilgrims stay out of trouble. Even if you have a CPA your trust and is trustworthy, it never hurts to understand how this works. 

When You Must Start To Take Distributions

If you inherit an IRA, you must take distributions. And you must do so the year following the year you inherit the money.   It doesn’t matter how old you are. And sadly, it doesn’t even matter if you need or want the money. The IRS boys want you to take your distributions and they don’t like  to be disappointed. (Read “IRA Beneficiary Rules“.)

The Calculation

Please don’t leave the calculation of your beneficiary IRA RMD (required minimum distribution) up to your custodian. They make too many mistakes.  You must confirm the calculation yourself or ask your tax professional to do so (but I’d confirm their calculations as well.)

Fortunately, it’s not that tough to do this yourself. Here’s your formula to make the calculations:

1. Take the year the beneficiary was born and subtract it from the year the decedent died. Then add one. This is the age of the beneficiary in the first year she must take a distribution.  This will be important later.  Let’s say you were born in 1960 and you inherit money from your aunt who died in 2017.  2017 -1960 is 57.  57 plus 1 is 58.  When the beneficiary reaches age 58, they must take a distribution. Simple.

2. Look up IRS Publication 590 table 1.  There is a factor that corresponds to the “age” you calculated in the first step.  In our example, the factor is 27

3. Divide the account balance at the end of the year by the factor.  This is the amount you must withdraw. So if the end of year balance of the inherited IRA is $100,000, you divide that balance by $100,000 and determine that the RMD amount you must withdraw this year is $3703.  That is the minimum you must take.

4. Take the distribution.

5. For each subsequent year, take the factor from the previous year and subtract “1”. So in this case, the factor for next year will be 26.  Divide the year end balance this year by this new factor.  Take distributions.

EXAMPLE 1

Lets go through another example.

Let’s say I was born in 1957 and I inherited money from Joe who died in 2011. I take 2011 and subtract 1957 and add 1. The result is 55.   2011-1957+1=55. So, I’ll be 55 in 2012 and that’s the year I must take my first distribution. So far, so good.

Now I go to the IRS publication 590  and scroll down to the bottom to find table 1.  There I see my factor which is 29.6. I’ll use that factor in 2012. So if the balance in my inherited IRA is $100,000 on 12/31/11, I divide $100,000 by 29.6 to determine my RMD in 2012.  That’s the amount of money I must withdraw in 2012 in order to satisfy my RMD.

In 2013, I’ll use 28.6 as a factor. In 2014 I’ll use 27.6 etc

EXAMPLE 2

Again, I was born in 1957. I inherited money from Joe who died in 2000. Let’s do the calculations using the formula above. I’ll take 2000 and add 1 and then subtract 1957 to arrive at 44. That was my age in 2001 and it’s important because that’s the year I had to start taking my RMD.

Then I’ll look up my factor and get 39.8. That’s the factor I should have used in 2001. But in 2011 it’s 10 years later. So my factor is 29.8. If the balance on my account on 12/31/2010 was $100,0000, I’ll divide $100,000 by 29.8 and take a distribution of $3356. Simple as pie.   This is important because it’s very possible that you’ve been using the wrong factor.  If so, you need to calculate the right factor and work with your CPA to determine if you need to make any adjustments with the IRS.  If you have taken out MORE than your RMD in the past, it’s not a problem.  But if you haven’t taken enough, you are going to get slapped with a 50% penalty(that’s right…50%!).

If you think this is complicated, please give it a try anyway. You’ll see that it’s simple. Many banks and IRA custodians get this wrong like I said and I don’t want you to get in hot water because of their mistake.

Always consult with your tax professional of course.  But verify their calculations.  And feel confident that you can do this as well.  You will feel so great prancing in to your CPA’s office telling her that you confirmed that what she did was right (or discovered an error).  It’s pretty empowering.

Do you have an inherited IRA?  Were you involved in calculating the RMD?  Have you ever had a problem because somebody miscalculated the number?  I’d love to hear from you.  Leave a comment!

Tweet
Pin
Share5

Reader Interactions

User Generated Content (UGC) Disclosure: Please note that the opinions of the commenters are not necessarily the opinions of this site.

Comments

  1. Stacy says

    January 2, 2020 at 6:11 AM

    Why wouldn’t the investment advisor/Agent automatically set up automatic Annual RMD distributions for the client when they set up the account? Why leave it to the client to take care of?
    Thank you.
    Stacy

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Are You Human? * Time limit is exhausted. Please reload CAPTCHA.

Primary Sidebar

Who is Neal Frankle

Neal Frankle

I'm a CERTIFIED FINANCIAL PLANNER™ Professional with more than 25 years of experience. I feel very blessed and hope to share my personal financial experience and professional wisdom with readers of WealthPilgrim.
Read More »

Stay Connected

Facebook Twitter YouTube RSS

More Categories

Career Development
College Funding
Credit Cards
Credit Score Fixes
Money and Marriage
Debt Relief
Estate Protection
Property Investment Loans
Small Business Strategies
Spend Less Money

Disclaimer

Wealth Pilgrim is not responsible for and does not endorse any advertising, products or resource available from advertisements on this website. Wealth Pilgrim receives compensation from Google for advertising space on this website, but does not control the advertising selection or content. Please do the appropriate research before participating in any third party offers. The information contained in WealthPilgrim.com is for general information or entertainment purposes only and does not constitute professional financial advice. Please contact an independent financial professional for advice regarding your specific situation. Wealth Pilgrim does not provide investment advisory services and is not a registered investment adviser. Neal may provide advisory services through Wealth Resources Group, a registered investment adviser. Wealth Pilgrim and Wealth Resources Group are affiliated companies. In accordance with FTC guidelines, we state that we have a financial relationship with some of the companies mentioned in this website. This may include receiving payments,access to free products and services for product and service reviews and giveaways. Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.


About · Contact · Disclaimer & Privacy policy

Copyright © Wealth Pilgrim 2022 All Rights Reserved