July 22, 2024 – Wealth Planning Commentary

IRS Finalizes Inherited IRA Rules

Last week, the IRS unveiled the long-awaited final regulations on inherited IRAs post-2019. The change only applies to IRAs that were inherited by non-eligible beneficiaries where the deceased owner was taking Required Minimum Distributions (RMD) before passing away. Those who inherited an IRA before 2020 can continue taking RMDs as before and disregard these new rules.

If you inherited an IRA after 2020 and are not the spouse, a disabled person, or a minor, you are classified as a non-eligible beneficiary. All non-eligible beneficiaries must deplete the inherited IRA within 10 years after the owner’s death. If the deceased owner was taking RMD before they passed, you must also deplete the account by the 10th year and take annual RMDs up until this time. These mandatory RMDs start next year, 2025.

There is no need to worry about RMDs before 2025 because the IRS is giving you a free pass on RMDs from 2021-2024, so there is no need to stress. If you inherited an IRA in 2020, mark your calendar for 2030 as your deadline for depletion. You'll only need to focus on RMDs from 2025-2029 without any penalties for the early years.

If you are the surviving spouse who inherited an IRA after 2020, you have the option to stretch the distributions over your lifetime instead of taking them within ten years. Similar favorable rules apply to disabled persons and minors.

Are you thinking about taking an RMD this year, even though it's not mandatory? With the Tax Cuts and Jobs Act sunset looming in 2026, it might be a smart move. By smoothing out that income over time, you could potentially save on taxes down the road, especially if you expect some high-income years ahead.

Please reach out to your Wealth Manager with any questions about inherited IRAs.