The IRS has issued final regulations on inherited IRAs under the SECURE Act. The rules require most non-spouse beneficiaries to deplete inherited retirement accounts within ten years and take annual Required Minimum Distributions (RMDs). This marks a significant change from the previous lifetime “stretch” withdrawal option.
The 10-year withdrawal window could lead to higher tax bills, especially for high-income heirs. IRA expert Ed Slott advises considering larger withdrawals while tax rates are lower. Pre-tax inherited account withdrawals are subject to regular income taxes, and current lower federal income tax brackets are set to expire after 2025.
Starting in 2025, heirs, not spouses, minors, disabled, chronically ill, or certain trusts, must begin yearly RMDs from inherited accounts. Certified financial planner Edward Jastrem emphasizes understanding these new requirements to avoid penalties. If yearly RMDs are missed, a 25% penalty on the amount that should have been withdrawn applies, reducible to 10% if corrected within two years.
Experts recommend weighing current and future tax implications before deciding on withdrawal strategies.
New RMD requirements for inherited IRAs
The regulations provide some flexibility.
If the original account holder passes away before reaching the required beginning date for RMDs, beneficiaries have more leeway in timing withdrawals within the 10-year window. However, the account must still be emptied by the end of the 10-year window. There are also exemptions for certain “eligible designated beneficiaries,” who are generally not subject to the 10-year rule.
These include surviving spouses, minor children, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the deceased. The IRS has provided a grace period from 2021 through 2024, during which affected beneficiaries do not have to take RMDs. The era of stretching withdrawals over a lifetime is essentially over.
Beneficiaries subject to the annual RMD rule should plan how to manage inherited IRA funds over a shorter timeframe, balancing tax implications with financial needs and goals. Current retirement account holders and potential beneficiaries should stay informed and adjust financial planning accordingly as 2025 approaches. Given the complexity of these changes, consulting with a trusted financial advisor to review estate and tax plans and beneficiary designations is advisable.
The new IRS rules present both challenges and opportunities for those inheriting retirement accounts.
April Isaacs is a news contributor for DevX.com She is long-term, self-proclaimed nerd. She loves all things tech and computers and still has her first Dreamcast system. It is lovingly named Joni, after Joni Mitchell.
