Inherited IRAs are subject to required minimum distributions (RMDs), but the IRS has waived some Inherited IRA RMDs for 2024, allowing beneficiaries to skip withdrawals if they choose. This waiver applies to those on the 10-year Inherited IRA schedule, which requires beneficiaries to withdraw the entire balance by the end of the 10th year after death. While skipping RMDs may seem beneficial in the short term, it could result in larger tax bills in the future. Beneficiaries should carefully consider the implications of not taking RMDs and consult with a financial advisor to make an informed decision.
The 10-year rule for Inherited Retirement Accounts was introduced in 2020 under the Secure Act, replacing the stretch IRA strategy. Under this rule, beneficiaries must withdraw the entire Inherited IRA balance within 10 years of the original account holder’s death. There are exceptions for eligible designated beneficiaries who may still use a stretch IRA and are not subject to the 10-year rule. The IRS has proposed regulations that add additional requirements for beneficiaries of IRAs from account holders who died after reaching their required beginning date for RMDs. The confusion surrounding these regulations has led the IRS to waive RMDs for the fourth consecutive year.
Inherited Roth IRAs are not subject to RMDs in years one through nine under the 10-year rule, regardless of the deceased owner’s age. Beneficiaries of Inherited Roth IRAs can leave the funds in the account to grow tax-free and can withdraw them tax-free in the future. However, if beneficiaries need to max out their Roth 401(k) and Roth IRA each year, it may be wise to pull enough from the Inherited Roth IRA to make the maximum contribution to these accounts. This strategy can maximize tax-free compounding growth over a longer period than with the Inherited Roth IRA.
While skipping RMDs may seem like a good short-term tax plan, it may not be the best long-term strategy. The size of the Inherited IRA and the beneficiary’s overall household income should be considered when deciding whether to withdraw funds. Spreading out withdrawals over 10 years may result in lower tax brackets compared to withdrawing the entire amount over a shorter period. Beneficiaries should also take into account their financial situation and estimated future income, especially if they are nearing retirement or planning to move to a lower-tax state. Consulting with a financial advisor can help beneficiaries make the best decision for their individual circumstances.