The Internal Revenue Service (IRS) has announced that in 2024, IRA beneficiaries will not be required to take annual required minimum distributions (RMDs) for the fourth year in a row, based on the proposed regulations interpreting the 10-year rule of the SECURE Act. The SECURE Act, enacted in late 2019, eliminated the Stretch IRA and requires beneficiaries to fully distribute the inherited IRA within 10 years. The proposed regulations by the IRS in 2022 added complexity by requiring beneficiaries to continue RMDs for the first nine years before fully distributing the IRA by the end of the tenth year, but it only applies to traditional IRAs as original owners of Roth IRAs don’t have RMDs.
Despite objections from many tax practitioners, the IRS has not finalized the proposed regulations, stating in Notice 2024-35 that penalties for beneficiaries who fail to take RMDs mandated in 2024 will still be waived. This waiver also applied to RMDs not taken in 2021, 2022, and 2023, with the 10-year rule still in effect. The expected effectiveness of the regulations has been postponed until at least 2025, emphasizing that delaying distributions from an inherited traditional IRA may not be advisable. Regardless of the pending regulations, the full balance of the IRA must still be distributed by the end of the tenth year to avoid potential tax implications.
In determining the best strategy for distributing an inherited traditional IRA, beneficiaries are encouraged to develop a 10-year plan that considers various factors such as income, taxes, and the potential impact on their inheritance. Options include distributing the entire IRA immediately, taking a portion each year over 10 years to spread out the income and taxes, or allowing the income and gains to compound in the IRA for 10 years before distributing the entire amount in year 10. For some beneficiaries, waiting until they turn age 70 ½ and then taking qualified charitable distributions from the inherited IRA could be a favorable strategy if they are charitably inclined and will turn 70 ½ within the 10-year period.
When inheriting a Roth IRA, beneficiaries are still required to follow the 10-year rule, but there are no RMDs during years one through nine, and the distributions are tax-free. This simplifies the decision-making process compared to traditional IRAs, as beneficiaries don’t have to navigate the complexities of RMDs and potential tax implications. Overall, navigating the regulations and tax implications of inherited IRAs requires careful planning and consideration to ensure that beneficiaries make informed decisions that align with their financial goals and circumstances.
