How does the 5-year rule work for inherited IRAs?[ Edited ]
I have an inherited IRA with USAA that I received in 2009, the year of my mother's death. I have not been taking RMD's and will need to completely deplete the account. There was a one year waiver for 2009 and so do I need to empty the account, per IRS regs, by December 31st of 2014 or 2015?
If a list is ever created of the top 10 most confusing things, the US tax code will have to be somewhere near the top! Some aspects of it are just plain difficult to navigate and inherited IRAs are often right there in the mix. In light of this, I’m happy to give you the basic rules you’re seeking but I strongly encourage you to get with a CPA or other qualified tax advisor to discuss your situation just to make sure you don’t do anything wrong.
The 5-Year Rule
Because you did not begin taking required minimum distributions by December 31, 2010 (the year following the year of your mother’s death), you essentially elected to follow the IRS 5-year rule for IRA beneficiaries. Here’s the rule pulled from IRS Publication 590:
5-year rule. The 5-year rule requires the IRA beneficiaries to withdraw 100% of the IRA by December 31 of the year containing the fifth anniversary of the owner’s death. For example, if the owner died in 2013, the beneficiary would have to fully distribute the plan by December 31, 2018. The beneficiary is allowed, but not required, to take distributions prior to that date. The 5-year rule never applies if the owner died on or after his or her required beginning date.
Applying this to your situation means that you would have to fully deplete the account by December 31, 2014. Please note the last sentence of the rule though. If your mother passed away after she was required to begin taking distributions based on her age, this rule can’t be applied and you should have been taking RMDs each year. Hopefully that’s not the case here but if it is, that CPA I referenced earlier will come in handy.
Not the Only Approach
Finally for anyone else reading this, I want to point out that while in some cases the 5-year rule outlined above is a good approach, it’s probably the least tax-friendly way to handle an inherited IRA in most cases. When it’s an option, electing to take required minimum distributions over your life expectancy rather than using the 5-year rule will generally result in more tax benefits and greater flexibility to you over time.
Thanks so much for your question and best of luck!