Retirement Plans - Inherited IRA
Back to: Retirement Plans in Moneytree Plan
Moneytree Plan allows you to model Inherited IRAs, along with their various rules that differ depending on the beneficiary and original owner information. In order to model an Inherited IRA create an asset with the following information in the Description:
Group: Any Capital Asset
Type: Retirement Plan
Retirement Plan: Inherited IRA
Inherited IRA Information
Inheritor: This shows the individual who inherited the IRA. It is determined by the selection from the "Owner" drop-down in the Description details.
Relation to Owner: Choose how the inheritor was related to the original owner. This option determines the availability of various other options. The options include: Non-Spouse, Spouse, and Estate or Trust.
Special Options
Multiple Beneficiaries: Check this box if the IRA had more than one beneficiary. It is not available when the Relationship to Owner selected is spouse. When checked the Age of Oldest Beneficiary field becomes available.
Death Prior to Required Beginning Date: Check this box if the original owner passed away before they turned had to begin RMDs. When checked the 5 Year Rule option becomes available.
Roth IRA: Check this box if the IRA is a Roth.
Important Ages
Age Inherited: Enter the age that the new owner inherited the IRA. This impacts RMDs when select the Distribute Based on RMDs option, or when the balance must be emptied when selecting the 10-Year Rule or 5-Year Rule options. Moneytree Plan assumes end-of-year inheritance, so future inherited IRA balances will now appear until 1 year after the entered age.
Age of Oldest Beneficiary: Enter the age of the oldest beneficiary when the IRA was inherited (not necessarily their current age). It is only important when the inheritors are able to distribute from the IRA based on RMDs. The divisor used for RMDs is determined by the oldest beneficiary. Moneytree Plan does not relate this field with any individual in the plan, so the Age Inherited must still be entered. The Age Inherited is still used to track when the IRA was or will be inherited.
Since Moneytree Plan does not necessarily track the current age of the oldest beneficiary, this value is used in along with the Age Inherited to keep track of the when the IRA was or will be inherited. For this option to be available, 2 conditions must be met:
The Relation to Owner must be Non-Spouse or Estate or Trust.
The box Multiple Beneficiaries must be checked.
Age of Owner at Death: This is the age of the original owner when they passed away. It will impact the RMDs for an inheriting spouse when they distribute the balance based on RMDs without rolling over the IRA into their own. In order for this field to be available 3 conditions must be met:
The Relation to Owner must be Non-Spouse or Estate or Trust.
The box Death Prior to Required Beginning Date must be checked.
The option Distribute Based on RMDs must be selected.
Distribution Methods
10-Year Rule: This is currently the most common withdrawal method for non-spousal Inherited IRAs. With this rule, the balance of the Inherited IRA must be depleted 10 years after it is available to the inheritor. By default Moneytree Plan will hold all funds until the end of the 10 year period. Use Future Changes to model withdrawals before that time.
Rollover Into Own: This is only available when the inheritors Relation to Owner is spouse. In these cases, the inheritor rolls the inherited IRA balance into their own IRA. This makes the Inherited IRA no different than a typical IRA. RMDs will begin at age 72. For single individuals they are determined using the IRS Uniform Lifetime (Table III). For a remarried individual that is more than 10 younger than their spouse, RMDs are determined using the IRS Joint Life and Last Survivor Expectancy (Table II).
Distribute Based on RMDs: This option was mostly eliminated after the introduction of the 10-year rule. It is still available for IRAs inherited before 2020, and under specific circumstances. Under this rule, the Inherited IRA is drawn down using the IRS Single Life Expectancy (Table I).
For non-spouse beneficiaries: RMDs begin at the age inherited. In the first year the balance is divided by the life expectancy from Table I. For each subsequent year that value is decremented by 1, to a minimum of 1. For example, consider an individual who inherited the IRA at age 60. The life expectancy from Table I at age 60 is 25.2.
First year RMD = IRA balance / 25.2
Second year RMD = IRA balance / 24.2
Third year RMD = IRA balance / 23.2
For spouse beneficiaries: RMDs begin at the age inherited. The balance is divided by the life expectancy from Table I for every year (as opposed to adding 1 for future years). For example, consider an individual who inherited the IRA at age 60. The life expectancy from Table I at age 60 is 25.2.
First year RMD = IRA balance / 25.2
Second year RMD = IRA balance / 24.4
Third year RMD = IRA balance / 23.5
5-Year Rule (Inherited prior to 1/1/2020): Legally, this rule was replaced by the 10-year rule for any IRAs inherited after January 1, 2020. In Moneytree Plan this option is available if the box Death Prior to Required Beginning Date is checked. With this rule, the balance of the Inherited IRA must be depleted 5 years after it is available to the inheritor. By default Moneytree Plan will hold all funds until the end of the 5 year period. Use Future Changes to model withdrawals before that time.
Future Changes
Whereas most Future Changes for assets allow for either positive or negative values for contributions or withdrawals respectively, Inherited IRAs only support withdrawals from the account. These withdrawals are entered as positive values. Negative values are not accepted.
For Inherited IRAs, Future Changes are especially useful with the 5 and 10 year rules. They allow you to model gradual withdrawals from the IRA to avoid a large tax event when the program holds the balance until the end of the period. If there are insufficient funds to meet a scheduled distribution, only the available amount will be taken out.
One entry is assumed to continue until another entry is created, or until the balance is depleted. If a scheduled withdrawal does not meet the required distribution, this program will still take out the additional amount to meet the requirement. For the 5 and 10 year rules, if there is a scheduled distribution in the final year that does not deplete the account the program will take out the remainder to meet the rule requirements.