A 75-Year-Old With His Own $400,000 IRA and a $200,000 IRA From His Sister Cannot Use One Withdrawal to Cover Both RMDs

It may seem efficient to combine two IRA withdrawals into a single transaction, but the IRS applies different rules to inherited accounts. A seemingly harmless shortcut can therefore lead to an unexpected excise tax on money a retiree thought had already been handled.

A 75-year-old retiree owns two traditional IRAs. One is his own account, valued at about $400,000. The other is a $200,000 IRA he inherited from his sister. Each account has a required minimum distribution, or RMD, which is the minimum amount the IRS requires to be withdrawn from a tax-deferred account each year.

When the year-end deadline approaches, it can look practical to add the two RMDs together and take one larger withdrawal from a single account. That keeps the paperwork simple, but it does not always satisfy the tax rules.

If the full withdrawal comes only from the inherited IRA, the IRS treats the retiree’s own RMD as unpaid. That shortfall can trigger a 25% excise tax, which is the kind of mistake that can happen when accounts are handled as if they were interchangeable.

Why the IRS Treats the Accounts Separately

When a person owns more than one traditional IRA, Treasury rules allow each account’s RMD to be calculated separately, added together, and then withdrawn from one or more of the owner’s IRAs. IRS Publication 590-B explains the same flexibility in plain language. But that rule applies only to accounts the person owns outright.

Under 26 CFR 1.408-8(e)(2), an IRA received through inheritance is treated as the IRA of the deceased owner unless a surviving spouse elects to treat it as their own. Inherited IRAs can generally be combined only with other inherited IRAs from the same deceased person. That means the retiree’s own IRA and the IRA inherited from his sister remain separate for RMD purposes, and money withdrawn from one does not satisfy the other.

Employer plans are even less flexible. IRS Publication 5329 says each qualified employer plan, including a 401(k), generally must satisfy its own RMD. The main exception is 403(b) plans, whose RMDs can be totaled and taken from any one or more of the accounts. A related mistake can happen at brokerage firms, where each custodian may calculate the RMD only for the accounts it holds.

How the Inherited IRA Is Determined

The schedule for the inherited IRA depends on the sister’s age relative to the retiree and whether she had already begun taking 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 is an eligible designated beneficiary and may stretch withdrawals over a life expectancy. A brother who is older than his sister, or within 10 years of her age, fits that category.

If the beneficiary does not qualify, the inherited account generally must be emptied by December 31 of the year containing the 10th anniversary of the owner’s death. If the owner died on or after her required beginning date, Publication 590-B says the annual RMD is based on the longer of the beneficiary’s life expectancy or the deceased owner’s. If the beneficiary is older than the deceased owner, the beneficiary’s life expectancy is used instead. Either way, the inherited IRA has its own required amount each year.

What Happens If the RMD Is Missed

The regulations use a factor of 24.6 at age 75. Applied to a $400,000 balance, that produces an RMD of roughly $16,260.

If none of that comes from the retiree’s own IRA, the 25% penalty works out to about $4,065.

The penalty can be reduced to 10% if the missed amount is withdrawn from the same plan and the return is filed showing the tax within the correction window. In this example, that would lower the bill to about $1,626. The window ends at the earliest of three points: when the IRS sends a deficiency notice, when the tax is assessed, or the last day of the second taxable year beginning after the year in which the tax was imposed.

The tax is reported on Form 5329. That same form can also be used to request a waiver if the shortfall resulted from reasonable error and the filer is taking steps to fix it. The filer must attach an explanation, and Publication 575 instructs taxpayers to write “RC” beside the appropriate line and include the amount to be waived. Promptly correcting the missed distribution is part of what the IRS expects.

Taking too much from the inherited IRA does not create extra credit for later years. Publication 590-B says any excess over the required amount in one year cannot be carried forward to satisfy a future RMD. This is one of several IRA mistakes that can quietly cost retirees large sums over time.

Keeping the Two Accounts Distinct

An IRA inherited from someone other than a spouse cannot be treated as the beneficiary’s own account, and no money can be rolled into or out of it, according to Publication 590-A. It may move only by trustee-to-trustee transfer into an account maintained in the deceased owner’s name for the beneficiary, which preserves the separate identity of the inherited account.

Publication 590-B also says the custodian that held an IRA at the end of the previous year must report the RMD amount or offer to calculate it. A practical approach is to get each account’s figure from its custodian, note which account it applies to, and withdraw the correct amount from the correct IRA before the deadline.

Two Separate Numbers Must Be Met Each Year

For this retiree, the yearly task comes down to two distinct figures. One is the RMD tied to his own $400,000 IRA, which can be satisfied only from IRAs he owns. The other is the RMD tied to his sister’s $200,000 inherited IRA, which must be satisfied only from assets inherited from her. The IRS evaluates those obligations separately, so covering one twice does nothing to satisfy the other.