IRA owners can clearly combine the accounts they own and they can combine the required minimum distributions (RMDs) from multiple IRAs and take them from any one or combination of their IRAs. The rules for combining Inherited IRAs and RMDs are more complex.
An IRA owner cannot combine IRAs they own with IRAs that they have inherited, unless the inherited IRA came from their current spouse. IRAs that are inherited from the same person can be combined, as long as the RMD calculation is done in the manner for all of the inherited IRA accounts. Generally, this is easy. If Dad had two IRA accounts and you inherit half of each of those accounts because you are named on the beneficiary forms for those accounts, then you can combine them. If you keep the accounts separate, you can calculate the RMD on each account and then combine it and take all or any part of the RMD from either account as long as you take the full RMD.
Here is where it is not so easy.
Let’s change our previous example a little. Dad had two IRA accounts. You are named as a beneficiary on one of the accounts, but the second account has no beneficiary named. The default beneficiary is the estate and you inherit half of the estate, so you still get half of the second account.
However, these two inherited IRAs cannot be combined because you did not inherit them from the same person and the RMD calculation will not be the same. You inherited the first account from Dad and will be using your own life expectancy to calculate your RMDs. On the second account you inherited from the estate, not Dad, and the RMD method will be either the 5-year rule or the use of Dad’s life expectancy, depending on how old Dad was when he died. The RMDs from these two inherited IRAs also cannot be combined. Each account will have to distribute its own RMD.
Now, let’s change the example a little again. Dad had two IRA accounts. You are the named beneficiary on the first account and your brother is the named beneficiary of the second account. You will each use your own life expectancy to calculate your RMDs. But your brother dies six months after your Dad, in the same year. He named you as the beneficiary of his inherited IRA.
You are now the beneficiary of both of Dad’s IRA accounts, but you cannot combine them. Again, you did not inherit them from the same person and the RMD method will be different for the two accounts. You inherited one account from Dad and will use your own life expectancy for RMDS. You inherited the second account from your brother and will use his life expectancy for calculating RMDs on that account. The RMDs also cannot be combined for these two inherited IRAs. They will have to be taken separately from each account.
If you have inherited an IRA account, make sure you get advice from a knowledgeable advisor before doing anything with the inherited funds. You also might want to get a second opinion to double check the advice you get. There are a lot of individuals/custodians out there giving out bad advice.
By Beverly DeVeny, IRA Analyst with Ed Slott and Company