IRS Finally Clarifies Rules on Inherited IRA RMDs
In a major development for estate planning and retirement savings, the Internal Revenue Service (IRS) has recently issued definitive guidelines regarding Required Minimum Distributions (RMDs) for inherited Individual Retirement Accounts (IRAs). This clarification comes after considerable uncertainty for beneficiaries and their financial advisors following the introduction of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019.
Background on Inherited IRAs and RMDs
Inherited IRAs are retirement accounts passed down from a deceased account holder to their beneficiaries. Traditionally, beneficiaries were required to take RMDs based on their own life expectancy, allowing for potential tax-deferred growth of the inherited funds.
However, the SECURE Act made significant changes, effectively eliminating the “stretch IRA” strategy for many beneficiaries. Under the new rules, most non-spouse beneficiaries must withdraw the entire account balance within 10 years of the original account holder’s death, bypassing lifetime distributions.
Key Clarifications from the IRS
1. 10-Year Rule
The IRS has confirmed that the 10-year rule applies to most non-spouse beneficiaries of inherited IRAs. This means that they must fully distribute the inherited account by the end of the 10th year following the account holder’s death. However, beneficiaries can choose how to withdraw the funds during that time frame, allowing for flexibility based on their financial needs and tax situation.
2. Spousal Beneficiaries
Spouses have additional options. They can treat the inherited IRA as their own, which allows them to take RMDs based on their age, or they can elect to remain as beneficiaries while continuing to defer RMDs until the original account holder would have reached age 72 (or 73, depending on the year of birth).
3. Potential Exceptions
The IRS has also indicated that certain beneficiaries, such as minor children, disabled or chronically ill persons, or beneficiaries no more than 10 years younger than the deceased, may have different treatment under the rules, allowing for the possibility of life expectancy-based RMDs.
Impact on Estate Planning
These clarifications have significant implications for estate planning, making it critical for individuals to understand how their retirement accounts will be passed on to heirs. Financial advisors and tax professionals will need to ensure their clients are aware of the new rules and how they can best navigate them to minimize tax liabilities and maximize inherited assets.
Strategies for Beneficiaries
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Evaluate Withdrawal Timing: Beneficiaries should consider their tax situations and financial needs when planning to withdraw from the inherited IRA.
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Consult with Professionals: Navigating the complexities of inherited IRAs often requires expert advice. Consulting with financial advisors or tax professionals can provide personalized strategies and ensure compliance with IRS regulations.
- Consider Overall Estate Goals: Understanding how inherited IRA withdrawals fit into the broader estate plan can help in maintaining the financial legacy intended by the deceased.
Conclusion
The IRS’s clarification on inherited IRA RMDs comes as a welcome update for many Americans who are grappling with the implications of the SECURE Act. By understanding these new rules, beneficiaries can make informed decisions about their inherited assets, promoting better financial health and effective tax strategy moving forward. As always, staying informed and seeking professional advice can help ensure compliance and financial prudence in the face of changing regulations.
As the IRS continues to provide guidance, beneficiaries and estate planners should stay vigilant, ensuring that they adapt to any future updates that may affect inherited retirement accounts.
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You didn't mention that this guidance is effective in 2025.
I just switched up my Roth IRA to 50% SCHD, 25% SCHX, 25% SCHG, and my Roth 401k is 70% vanguard S&P 500 index, 20% vanguard growth index, and 10% vanguard international index. Seeking best possible ways to grow $350k into $1m+ before retirement, I'm 55.
I understand the 10-year rule but I thought the RMDs are based on the deceased person's age not the age of the beneficiary. Isn't that why when you set up inherited IRA at Schwab they ask you for the deceased person's birthday?
lol….I always thought you were from New Hampshire!!!
YOU FAILED TO MENTION THE MOST IMPOTANT ASPECT. This new rule ONLY applies to inherited IRA's from 2020 forward. You need to clarify that.
This only relates to inherited IRA's from 2020 forward.
Does anyone else have a problem with some faceless, nameless, unelected bureaucrat deciding what the law passed by Congress says?
Another bonus to the original owner of the Traditional IRA/401K getting it converted to a Roth IRA. Their heirs can let it continue to grow tax free for ten years, at which point they take all that growth out all tax free! No RMD’s for your heirs either.
so an inherited Roth could grow tax free for 10 years at which point the heir could withdraw it all tax free.
I’ve been tapping an inherited IRA and using proceeds to do a backdoor Roth up to the max per year. That’s legal and has net effect of a Roth conversion.
Use the inherited ira funds to pay the tax on Roth conversion each year.
I almost believe the IRS drug their heels on this and gave a pass on RMDs for 4 years but still are going to hold the inheiritant to take it out within the 10 years from the death. They should have at least made the start of the clock at the time of their decision. Trying to increase potential rates wouldn't surprise me at all.
If funds transferred as Roth Ira to children. What has to be done in 10 years? I thought it to be tax free money.
Thanks. Very complicated rules depending on all the various scenarios. After reading the full text from the IRS, I "think" they also clarified that if you inherit an IRA from an "eligible" designated beneficiary, you have to take it out in 10 years (but I couldn't see where RMDs were mandated in such scenario). I'm not sure if I read it correctly or not.
Approximately $18,000 of a $325,000 inheritance from my older brother is a traditional IRA that was originally our mothers.. I've been taking annual rmds from the inherited IRA since 2020 current balance is $1,200. Luckily only the traditional inherited IRA is the only portion of my inheritance that is taxable. Most of my inheritance was a taxable brokerage account with a stepped-up cost basis, savings account and life insurance.
What is this RMD stuff about? What problem(s) is this meant to solve??? To me, it’s just bureaucratic BS.
PLEASE PLEASE PLEASE explain that this does NOT apply to anyone who is qualifyingly DISABLED and is inheriting a ROTH IRA. Someone who is DISABLED will NOT be required to take all distributions within that 10 year window. They will be able to take the inherited distributions OVER THEIR LIFETIME. Misinformation on this point might harm someone who is disabled and who is already needing to carefully manage their financial affairs because of enrollment in various governmental programs and other financial considerations. Please also explain the exemptions to this 10 year rule!!!
The SCOTUS overturned Chevron Deference, meaning IRS regulations could fall, pending courts cases that challenge the agency. The Congress could then debate in committee and create the regulation as president signed law, or inact a different rule on the matter.
Well Josh I was allowed to convert one of my Mom’s IRAs to Roth IRA. I paid income taxes that year on the amount converted and opened a non-spousal IRA to put it in. Did they change that when they started the 10 year withdrawal time frame?
Who decides your life expectancy? I don’t know that would even work.
Let’s say I’m 60. Inherited IRA from non-spouse who was 85. I have to deplete the funds in 10 years but how are RMDs calculated for me? Is it just a personal judgement call?
Do the same rules apply to an inherited HSA?
If you have been taking Inherited IRA RMDs well before the last ten years. Are you grandfathered with RMDs based on your life expectancy?
The 10 year rule to deplete does NOT apply if the non-spouse INHERITED IRA was inherited BEFORE 2020. I know this because I inherited one in 2016.
I thought the RMDs a non-spouse is required to take would be based on the decedent’s life expectancy (although, ironically, I guess that’s zero now)?
I inherited an IRA 5 years ago (2019) and am trying to get it cleared out this year, which is the last year I'll be self-employed. The plan has been to pull out an amount equal to the solo 401K contribution limit, and dump the Inherited IRA funds into the solo-K account. Then at the end of the year, convert the self-employed solo-K into my Roth IRA. I end up paying tax twice on the funds but get one deduction for the solo-K contribution, so it works out similar to a Roth conversion without being a Roth conversion.
Good way to go if you are self-employed and have an inherited IRA. And yes, it's a good idea to get those inherited funds out of the way ASAP because of all the associated rules, even though in my case, I think I fall under the old rules.
Ideal if one or both of spouses who inherit the IRA are healthy enough AND DONT NEED THE DISTRIBUTION…. use the 10 year payout to fund a life policy that can provide tremendous tax free leverage to family with the “found” inheritance
What if children/grandchildren IDENTIFY as a spouse?
Thanks for the new information! I will tell her if she inherits IRA/401k, she will need to take the distributions every year. I told her the secure act said she could take it out at year 10 but I now know that is not accurate. I am retiring in 7.5 years at age 54.5 with IRS rule of 55 anyway. So I may not do Roth conversions if we get anything from her parents. so important that I'm doing Roth 401k now! My in laws are nice people and I hope they live to 100! I don't need their money I just don't want to get killed with taxes and I'm sure they would tell me to prepare for the tax bomb coming my way!