United States
Hong KongRequired minimum distributions, and the ten-year rule for heirs
Distributions must begin at 73, calculated by dividing the prior year-end balance by a life expectancy factor. Most non-spouse beneficiaries must now empty an inherited account within ten years rather than stretching it over a lifetime.
The rule that eventually forces tax-deferred money into income, and the rule that changed most for beneficiaries.
When they start
Age 73, rising to 75 for those reaching 74 after 2032. Check the year.
The first distribution can be delayed to 1 April of the year after reaching the required age. Doing so means two distributions in that year, which frequently pushes income into a higher bracket - so it is usually the wrong choice.
How they are calculated
Prior year-end account balance divided by a life expectancy factor from the Uniform Lifetime Table.
A separate Joint and Last Survivor Table applies where the sole beneficiary is a spouse more than ten years younger, producing a smaller distribution.
The calculation is per account for IRAs, but the total may be taken from any one of them. For 401(k) plans it must be taken from each plan separately, which is a distinction questions use. Plans are per plan.
A 25 per cent excise tax on the amount not taken, reduced to 10 per cent if corrected promptly within a correction window. It was 50 per cent before recent legislation, so older material overstates it.
What is exempt
- Roth IRAs, during the original owner's lifetime.
- Roth 401(k) accounts, following a recent change - older material says otherwise.
- A still-working exception for a current employer's plan, where the employee is not a 5 per cent owner.
The still-working exception does not apply to IRAs or to a previous employer's plan, which is why rolling an old 401(k) into a current employer's plan can defer distributions for someone still working past 73.
The ten-year rule
The stretch IRA is largely gone. Most non-spouse beneficiaries must empty an inherited account by the end of the tenth year after the year of death.
Where the owner had already begun distributions, annual distributions are also required during that ten-year period. Where they had not, the beneficiary can take nothing until year ten - though concentrating a decade of income into one year is rarely optimal.
Eligible designated beneficiaries
A defined group who may still stretch: a surviving spouse, a minor child of the owner until majority, a disabled or chronically ill individual, and anyone not more than ten years younger than the owner.
A minor child moves to the ten-year rule on reaching majority, which is a detail worth holding. And a surviving spouse has the additional option of treating the IRA as their own, which is generally the best outcome where they are over 59½. Majority starts the clock.
Contribution and benefit limits are indexed annually and several were changed by recent legislation. Confirm the current figure against the IRS before relying on it.
Common questions
At what age do required minimum distributions begin?
Age 73, rising to 75 for those reaching 74 after 2032. The first can be delayed to 1 April of the following year, though that produces two distributions in one year.
How is an RMD calculated?
Prior year-end account balance divided by a life expectancy factor from the Uniform Lifetime Table, or the Joint and Last Survivor Table where a spouse more than ten years younger is the sole beneficiary.
What is the penalty for missing one?
A 25 per cent excise tax on the amount not taken, reduced to 10 per cent if corrected promptly. It was 50 per cent before recent legislation, so older sources overstate it.
What is the ten-year rule?
Most non-spouse beneficiaries must empty an inherited account by the end of the tenth year after death. Annual distributions are also required during that period where the owner had already begun taking them.
Who can still stretch an inherited IRA?
Eligible designated beneficiaries - a surviving spouse, a minor child of the owner until majority, a disabled or chronically ill individual, and anyone not more than ten years younger than the owner.