RMDs from Inherited IRAs Deferred Until 2025

On April 16, 2024, the Internal Revenue Services (IRS) released Notice 2024-35, granting relief (again!) for failure to make requirement minimum distributions (RMDs) from an inherited IRA (or from other inherited retirement accounts). This means that if you have inherited an IRA from someone who passed away in 2020 or later, then you are not required to take a minimum distribution this year. That being said, it may still make tax sense to make a distribution in 2024 even if not technically required to do so.

Inherited IRA distribution rules

Before the SECURE Act of 2019, beneficiaries of inherited IRAs could spread out their withdrawals over their lifetime, a strategy often referred to as the “stretch” IRA. This approach allowed beneficiaries to lower their annual tax liability. However, the SECURE Act significantly altered the rules surrounding RMDs.

Under the new law, non-eligible designated beneficiaries who are neither the spouse, a minor child, disabled, chronically ill, or certain trusts of the deceased must exhaust their inherited IRAs by the tenth year following the original account holder’s death – the 10-year rule. Never one to make things easy, the IRS proposed regulations in February 2022 that added a second requirement for beneficiaries who inherit IRAs from those who died after reaching their required beginning date (“RBD”). The IRS said this group of beneficiaries also must take annual RMDs for years one through nine of the 10-year rule term. This additional provision has been controversial and confusing, with many taxpayers and advisors interpreting the law to not require any amounts be distributed during those 10 years.

Recognizing the confusion surrounding RMDs for traditional inherited IRAs, the IRS, for the fourth year in a row, has waived those RMDs by saying there will be no IRS penalty for failing to take them. This gives taxpayers some breathing room and effectively suspends the excise tax for failing to take RMDs during this period for those beneficiaries subject to the 10-year rule. The waiver applies if the original account holder died in 2020, 2021, 2022, or 2023 and had reached their RBD (typically April 1 of the year after the owner turns 73).

Remember that not taking RMDs could mean larger ones in the future, which could increase your overall tax burden on your inheritance. Without final regulations, we do not know what the rule will be, or how distributions that were not taken in earlier years because of the relief granted by the notices will be made up.

Final regulations are anticipated later this year and to apply for RMDs beginning on or after January 1, 2025.

Implications for tax planning

This delay in mandatory distributions could provide tax planning opportunities for beneficiaries, potentially allowing them to manage income more effectively and reduce their overall tax liability for the year. In the meantime, beneficiaries are advised to consult with financial advisors to understand their responsibilities and potential penalties under the SECURE Act (when RMDs begin, how much to withdraw, how long to withdraw, etc.). The IRS’s extensions may provide some short-term relief, but beneficiaries will need to plan for the eventual expiration of these waivers.

Remember, the bigger your inherited IRA, the bigger the future tax issues you may face. Depending on your overall household income and the size of the inherited IRA, you may still want to withdraw from your inherited IRA this year, even if it is not technically required. In most cases, spreading out the withdrawals from your inherited IRA over 10 years will push less of your income into higher brackets than if you pulled it out over six years or one year. If you are about to retire during the 10-year rule, you may be okay with larger withdrawals once you aren’t earning an income working or you are moving to a lower-tax state soon and could put off withdrawals.

And as a big reminder, while they are subject to the 10-year rule, inherited Roth IRAs are not subject to RMDs in years one through nine, regardless of the decedent’s age. If you don’t need the money, you might want to leave the funds in your inherited Roth IRA for as long as possible for as much of the 10-year period. Your account will grow tax-free and can be withdrawn tax-free in the future.

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If you have further questions or for more information or tailored guidance, please reach out to our office to set up a discussion with Matt or John.

Photo by Chad George on Unsplash

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