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 Under the 10-year rule, your entire Inherited IRA (or Inherited Roth IRA) balance must be withdrawn by the end of the 10th year after death.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. The 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 should 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 401(k) and Roth IRA each year. It could be wise to pull enough to make the maximum contribution each year to these accounts with funds from your Inherited Roth IRA. Assuming you plan to live for more than 10 years, you will be able to get more tax-free compounding growth in your accounts than with the Inherited Roth IRA.
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.
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