If you are lucky enough to have inherited an IRA, you may need clarification on the seemingly ever-changing rules and deadlines around the required minimum distributions. The IRS has just waived some Inherited IRA RMDs again for 2024. Even if you are not technically required to make a withdrawal, it may still make tax sense to make a distribution in 2024.
This is the fourth year in a row that the IRS has kicked the can down the road for people needing to start RMDs on Inherited IRAs under the new rules. This waiver applies to those on the 10-year Inherited IRA schedule. At this point, there is no indication that the endpoint for the 10 years you have to withdraw your entire Inherited IRA completely is changing. So, skipping RMDs now could mean larger tax bills down the road.
What is the 10-year rule for inherited retirement accounts?
In 2020, when the original Secure Act took effect, the stretch IRA strategy was eliminated for most beneficiaries of retirement accounts. The more confusing 10-year rule replaced it. Under the 10-year rule, your entire Inherited IRA (or Inherited Roth IRA) balance must be withdrawn by the end of the 10th year after death.
There are a few exceptions to this rule for those deemed to be eligible designated beneficiaries. These beneficiaries may still be able to use a stretch IRA and are not subject to the 10-year rule.
Never one to make things easy, the IRS has proposed regulations (from February 2022) that added a second requirement for beneficiaries who inherit IRAs from those who died after reaching their required beginning date, or RBD, for taking required minimum distributions. So that you know, the RBD date is generally April 1 of the year after the year the IRA owner turns 73. 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. Recognizing this issue, 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. Remember that not taking RMDs could mean larger ones in the future, which could increase your overall tax burden on your inheritance.
10-year rule for inherited Roth IRAs
Notice 2024-35 will not apply to your account if you have an Inherited Roth IRA. Under the 10-year rule, Inherited Roth IRAs are not subject to RMDs in years one through nine, regardless of the deceased's age. If you don't need the money, you might want to leave the funds in your 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.
The exception here would be if you still need to max out your Roth workplace retirement plan and Roth IRA each year. It could be wise to pull enough from your Inherited Roth IRA to be able to afford increasing your contributions to make the maximum contribution each year to these accounts.
Skipping RMDs may not be a great long-term tax plan
The bigger your Inherited IRA, the bigger the future tax issues you may face. It's a good problem to have, but still. 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. Of course, consider your financial situation and estimated future income. If you are about to retire during the 10-year rule, you may be OK 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.
This article was written by David Rae from Forbes and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to [email protected].
FAQs
Roth IRAs do not require withdrawals until after the death of the owner. Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts.
Is the IRS waiving RMDs for inherited IRAs? ›
This means some beneficiaries of inherited IRAs have had more time to adapt to distribution requirements. The IRS will waive penalties for RMDs missed in 2024 from IRAs inherited in 2023, where the deceased owner was already subject to RMDs.
Has the IRS extended tax relief for RMDs to 2024? ›
The IRS previously extended the 2022 relief to 2023 Specified RMDs in Notice 2023-54. Now, in Notice 2024-35, the IRS again extended this relief to 2024 Specified RMDs. In this most recent guidance, the IRS also provided that the 2022 proposed RMD regulations, if finalized, will not apply earlier than 2025.
What is the new IRS rule on inherited IRAs? ›
If you inherited a retirement account in the past several years, it's likely you'll have to take distributions and pay taxes on all that money within 10 years, according to new, finalized IRS rules.
What will my RMD be in 2024? ›
Calculating your own RMDs
Say your IRA was worth $500,000 at the end of 2023, and you were taking your first RMD at age 73 this year. Your distribution amount would be $18,868 ($500,000 divided by 26.5). Likewise, if you were turning 85 in 2024, your RMD would be $31,250 ($500,000 divided by 16).
What are the IRA rules for 2024? ›
More In Retirement Plans
For 2024, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than: $7,000 ($8,000 if you're age 50 or older), or. If less, your taxable compensation for the year.
What are the new IRS rules for 2024? ›
For the 2024 tax year, individual tax filers will not have to pay any capital gains tax if their total taxable income is $47,025 or less. That's an increase from the income threshold of $44,625 in 2023. The capital gains tax rate jumps to 15% if your income is $47,026 to $518,900.
What is the Path Act for 2024? ›
Educator Expense Deduction – The PATH Act made the educator expense deduction permanent, allowed the maximum deduction to be increased annually for inflation (it's capped at $300 for both the 2023 and 2024 tax years), and made professional development classes a deductible expense.
What are the new tax changes for 2024? ›
For single taxpayers and married individuals filing separately, the standard deduction rises to $14,600 for 2024, an increase of $750 from 2023; and for heads of households, the standard deduction will be $21,900 for tax year 2024, an increase of $1,100 from the amount for tax year 2023.
What is the best thing to do with an inherited IRA? ›
Take a lump-sum distribution
As the beneficiary, you may distribute the account assets in a lump sum without facing a 10% early withdrawal penalty. (If you inherit a Roth IRA, the account must have been open for at least five years to avoid paying a penalty.)
The 10-Year Rule for Inherited IRAs
Eligible designated beneficiaries are exempt from the 10-year rule. This applies to surviving spouses or minor children (until age 21), the chronically ill or disabled, and people who are not more than 10 years younger than the decedent. They can still do stretch IRAs.
How do I avoid paying taxes on my inherited IRA? ›
There are a few things you can do to avoid paying taxes on an inherited IRA. The most obvious thing is to not take a lump-sum distribution. If you inherit the IRA from your spouse, wait until the required minimum distributions begin or take distributions based on your own life expectancy.
What are the RMD rules for beneficiary of inherited IRAs? ›
For non-spouse beneficiaries required to follow a 10-year life expectancy withdrawal schedule, meaning you inherited from someone who passed away in 2020 or later, and that person had begun taking RMDs, in order to avoid an IRS missed RMD penalty of up to 25%, withdrawals must begin no later than December 31, 2025.
Do inherited IRAs have to be distributed in 10 years? ›
All distributions must be made by the end of the 10th year after death, except for distributions made to certain eligible designated beneficiaries. See 10-year rule, later, for more information.
What are the RMD rules for 2025? ›
Final regulations anticipated for 2025
The regulations will incorporate SECURE 1.0 changes to the RMD rules, including an increase in the RMD beginning age from 70-1/2 to 72 and the new 10-year rule. The regulation will also include some later changes made by the SECURE 2.0 Act of 2022 (Div.
