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The rules for required distributions from inherited IRAs have changed a lot over the last few years.
For a few years there was some grey area in how recent tax laws like the SECURE Act should apply to inherited IRA RMDs. Now in 2024, we have some more guidance from the IRS for how much those who inherit IRAs are required to take out each year.
First, know that if you are the beneficiary of an IRA owner who passed away in 2019 or earlier, changes from the SECURE act do not apply to you. You still have your annual distributions you must take out each year, but those have not changed. You can continue what you are doing.
If the original IRA owner died in 2020 or later, the SECURE Act applies to you, and you have a fee more rules to know about. There are a lot of different rules here depending on your relationship to the original owner, but in this video we’re going to cover just the most common scenario in which a non-spouse beneficiary who is more than 10 years younger than the original owner, inherits an IRA.
So this is inherited from your parents, grandparents, or likely aunts and uncles.
If this applies to you, then you have 2 requirements to be aware of:
First, the entire account must with withdrawn in 10 years.
This was the big change from the SECURE Act, and opens up potential tax pitfalls for those who fail to plan a tax-efficient way to empty the account over the 10-year period. Waiting to disburse then entire account in year 10 could result in a big jump in tax brackets, and ultimately leave you with less money than if you would have planned ahead.
In addition to that 10-year rule, beginning in 2025 you must also take an annual RMD from the account based on the original IRA owners age.
Effectively, you have to take the RMD that the original IRA owner would have had to take if they were alive. There are some RMD calculators online that can help you calculate this amount. The bigger issue is knowing when to take more than that minimum amount to prevent large tax bills later.
Like I said, there are a lot of caveats to this rule that you need to be aware of. If you are a surviving spouse or within 10 years of age to the original owner, you have a few other options.
Likewise if you are a minor or disabled, you can delay required withdrawals a bit longer.
But for most heirs, this new rule requiring annual distributions is going to apply.
And that puts you in position to plan exactly how you need to distribute this account in the most tax-efficient manner. Working with a tax professional or financial planner can provide a lot of value here, making sure you are not setting yourself up for a big tax bill later on, or paying too much in taxes today.
If you are looking for help managing your inherited accounts and the tax implications, please reach out to a Financial Planner like Arnold and Mote Wealth Management.