The IRS has recently waived some Inherited IRA required minimum distributions (RMDs) for 2024, marking the fourth consecutive year that this rule has been extended. This waiver specifically applies to those on the 10-year Inherited IRA schedule, allowing beneficiaries more time to withdraw their entire Inherited IRA balance. However, while it may not be necessary to make withdrawals this year, it may still be beneficial from a tax perspective to do so in 2024. Skipping RMDs now could lead to larger tax bills in the future, as the 10-year rule deadline for withdrawing the entire Inherited IRA remains unchanged.
Following the implementation of the Secure Act in 2020, the stretch IRA strategy was eliminated for most beneficiaries of retirement accounts, replaced by the 10-year rule. Under this rule, beneficiaries must withdraw the entire Inherited IRA (or Inherited Roth IRA) balance by the end of the 10th year after death. While 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 another requirement for beneficiaries inheriting IRAs from individuals who died after reaching their required beginning date for RMDs.
In the case of Inherited Roth IRAs, Notice 2024-35 does not apply, meaning beneficiaries are not subject to RMDs in years one through nine, regardless of the age of the deceased. If funds from an Inherited Roth IRA are not immediately needed, it may be beneficial to leave them in the account for as long as possible to allow for tax-free growth and future tax-free withdrawals. However, if it is necessary to maximize contributions to Roth 401(k) and Roth IRA accounts, withdrawing from the Inherited Roth IRA to make those contributions may be a wise strategy to take advantage of tax-free compounding growth over time.
While skipping RMDs in the short term may seem advantageous, it may not be a wise long-term tax plan, especially for larger Inherited IRAs. Depending on your household income and the size of the Inherited IRA, making withdrawals this year, even if not required, could be beneficial. Spreading out withdrawals over the 10-year period may help avoid pushing your income into higher tax brackets. Consider your financial situation and estimated future income, as well as factors such as retirement plans or potential moves to lower-tax states that may impact your decision on when to make withdrawals from your Inherited IRA.
In conclusion, beneficiaries of Inherited IRAs should be aware of the changing rules and deadlines regarding RMDs and the 10-year rule. While the IRS has waived some RMD requirements for 2024, it is important to consider the potential tax implications of skipping withdrawals, especially for larger Inherited IRAs. Making strategic decisions about when to withdraw funds from an Inherited IRA, based on your unique financial circumstances and goals, can help minimize future tax burdens and maximize the benefits of these accounts in the long term.
