Traditional IRAs are a good way to save for retirement, but at some point the funds must be paid out. If you are the IRA owner, you must start the payouts -- referred to as the "required minimum distribution" or RMD -- at age 70½. If the IRA was left to you by will, you are the beneficiary of the IRA and different RMD rules apply. RMD rules for IRA beneficiaries also differ depending on whether the beneficiary is the owner's surviving spouse, another person, or an entity such as the IRA owner's estate.
RMD for IRA Owners
RMD payouts must begin by April 1 following the date an IRA owner reaches age 70½. After this first payout, an IRA owner must take the RMD by December 31st of each year. The only exception is when an IRA owner dies after reaching age 70½ but before the following April 1st. Even if you started receiving payouts prior to age 70½, the RMD rules still apply at age 70½. Calculating the amount of RMD depends on your circumstances, such as marital status and whether your funds are in an individual retirement annuity.
Surviving Spouse as Sole IRA Beneficiary
If you are the surviving spouse of the IRA owner, and there are no other beneficiaries, you can elect to treat the IRA as your own -- RMD is determined with you as the owner, based on your age and life expectancy. You also have the option of continuing to take RMD payments on your deceased spouse's schedule. With this option, you wait to take the RMD in the year that your spouse would have reached age 70½.
Other Individual IRA Beneficiaries
Individual beneficiaries other than a surviving spouse have two options regarding RMD. One option is to elect to empty the entire IRA account within five years of the decedent's death. This option will result in maximum tax liability. The other option, with lower tax liability, is to stretch the RMD payout in yearly payments. This type of payout begins the year the IRA owner died and continues for a number of years, calculated based on the beneficiary's current age and an IRS life expectancy table. If you don't make a decision, the IRS decides for you: if you do not receive an RMD payout by December 31 in the year you inherited the IRA, you are required to empty the account within five years.
Non-individual Beneficiary and the Five-Year Rule
A non-individual beneficiary, such as a charitable trust or the decedent's estate, is generally required to receive the entire IRA within five years of the decedent's death. The funds do not have to be taken until the fifth year. An exception to this rule applies when the IRA owner dies on or after age 70½. The non-individual beneficiary has the option of stretching the payout for a number of years, calculated based on the deceased owner's age and an IRS life expectancy table.