A 75-Year-Old With His Own $400,000 IRA and a $200,000 IRA Inherited From His Sister Can’t Take Both RMDs From One Account. Pull It All From the Inherited One and the IRS Treats His Own RMD as Missed, With a 25% Penalty

A 75-year-old retiree has two traditional IRAs. One is his own and is worth about $400,000. The other is a $200,000 IRA he inherited from his sister. Each has a required minimum distribution, or RMD, the smallest amount the IRS says must come out of a tax-deferred account every year.

When December rolls around, the sensible-sounding move is to add the two RMDs together and take one big withdrawal from one account. This approach keeps the paperwork simple.

But if the entire withdrawal comes from the inherited IRA, the IRS counts his own RMD as missed, and the excise tax on that shortfall is 25%. These kinds of errors can happen when accounts are combined.

Two Separate Accounts Under IRS Rules

When someone owns several traditional IRAs, Treasury regulations let them calculate each account’s RMD separately, add the amounts, and take the total from one or more of the IRAs. IRS Publication 590-B says the same thing in simpler language. That flexibility only covers accounts a person owns outright.

Under 26 CFR 1.408-8(e)(2), an IRA a person receives because someone died counts as an IRA of the person who died, unless a surviving spouse chooses to treat it as their own. You can combine inherited IRAs only with other IRAs inherited from the same person, so his IRA and his sister’s IRA are two separate accounts with two separate requirements. Money taken from one account doesn’t count toward the other.

Employer plans are stricter, and IRS Publication 5329 says each qualified employer plan, such as a 401(k), generally has to meet its own RMD. The one carve-out is 403(b) accounts. You can total their RMDs and take them from any one or more of them. 24/7 Wall St. recently covered a related trap: each brokerage calculates the RMD only for the accounts it holds. This is the same kind of checklist error, just under a different rule.

How a Sibling’s Inherited IRA Schedule Works

The schedule for the inherited IRA depends on how old his sister was compared with him and whether she had already started taking her own RMDs. Under 26 U.S.C. § 401(a)(9)(E)(ii)(V), a beneficiary who is not more than 10 years younger than the original owner counts as an eligible designated beneficiary. That category can spread withdrawals over a life expectancy. A brother who’s older than his sister, or within 10 years of her age, meets that test.

A beneficiary who doesn’t qualify must empty the account by December 31 of the year that includes the 10th anniversary of the owner’s death. If the owner died on or after her required beginning date, Publication 590-B says the beneficiary bases annual RMDs on the longer of his own life expectancy or hers. If the beneficiary is older than she was, use the beneficiary’s life expectancy. Either way, the inherited account generally has its own yearly amount.

What a Missed RMD Costs and How It Gets Fixed

The regulations use a 24.6 factor at age 75. Run a $400,000 balance through it, and the RMD comes to roughly $16,260.

If he takes none of that from his own IRA, the 25% tax works out to about $4,065.

The rate drops to 10% if he takes the missed amount from the same plan and files a return showing the tax, both within what the law calls the correction window. In this example, that brings the bill down to about $1,626. The window closes at whichever comes first. That could be when the IRS mails a deficiency notice, assesses the tax, or the last day of the second taxable year that begins after the taxable year in which the tax was imposed.

The tax gets reported on Form 5329. The same form is used to request a waiver if the shortfall resulted from reasonable error and the filer is taking steps to correct it. The filer attaches a statement explaining the issue, and Publication 575 says to write “RC” next to the right line, along with the amount to be waived. Quickly removing the missed amount is part of the fix the IRS wants to see.

Taking too much from the inherited IRA doesn’t build up credit, either. Publication 590-B says any amount above the RMD in one year can’t count toward the required minimum distribution in a later year. This split-account rule is one of several IRS traps that quietly drain six figures from retirement accounts over time, and we covered the rest in a free guide here.

Keeping Each Account Separate From the Other

An IRA inherited from anyone other than a spouse can’t be treated as the beneficiary’s own, and nothing can be rolled into it or out of it, according to Publication 590-A. It can move only by trustee-to-trustee transfer into an account kept in the deceased owner’s name for the beneficiary, and keeping that title in place prevents the two accounts from combining.

Publication 590-B also says the custodian that held an IRA at the end of the prior year must report the RMD amount or offer to calculate it. One routine is to get each account’s figure from its custodian, write down which account it belongs to, and take each amount from the right account before December 31.

Two Numbers to Track Every Year

For this retiree, each year comes down to two numbers. One is the RMD on his own $400,000 IRA, which can come only from IRAs he owns. The other is the RMD on his sister’s $200,000 IRA, which can come only from IRAs he inherited from her. The IRS checks each number separately, so covering one twice still leaves the other at zero.

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