IRS Issues New Guidelines for Inherited IRAs: 5 Key Points to Know
The IRS has finally issued the much-anticipated guidance on inherited IRAs, bringing clarity to a topic that has caused confusion for years. Here are five key points you need to know about the new rules, and why it's crucial to start planning your distributions now.
- Understanding the New 10-Year Rule
Starting in 2025, if you inherit an IRA, you must take annual required minimum distributions (RMDs) beginning the year after the original owner's death. This is in addition to the rule that the entire inherited IRA must be distributed by the end of the 10th year following the original owner's death.
Due to previous uncertainty, the IRS will not require missed RMDs from 2021–2024 to be made up. However, distributions must start in 2025, and the 10-year window is not reset. For example, if you inherited an IRA in 2020, you must begin RMDs in 2025, and the account must be fully distributed by the end of 2030.
- Rules for Non-Spouse Beneficiaries
The 10-year distribution rule, including annual RMDs, applies only to non-spouse beneficiaries such as children, siblings, and friends. Spouses have different options, including continuing distributions, rolling the IRA into their own account, or stepping into the deceased's shoes under SECURE Act 2.0.
- Age of the Deceased Matters
The final regulations apply to non-spouse beneficiaries when the deceased was over 73 and already taking RMDs. If the deceased was under 73, beneficiaries can take distributions at any time during the 10-year period, even waiting until the 10th year.
- Avoid Ballooning Distributions and Big Tax Bills
RMDs will not spread distributions proportionally across the 10-year window. This could result in a large remaining balance in the 10th year, leading to a significant tax hit if taken all at once. We can help you plan distributions in a tax-efficient manner, considering your income levels and potential charitable giving.
- Avoid Penalties
It's crucial to be aware of the need to take annual RMDs to avoid penalties, which are 25% of the missed distribution amount. Proactive planning is essential to navigate the complexities of the new rules and optimize your inherited IRA strategy.
Navigating these new IRS guidelines can be complex, but you don't have to do it alone. Our team is here to help you understand the new rules and develop a distribution plan that minimizes your tax burden and maximizes your financial benefits. Contact us today to schedule a consultation and ensure you're making the most of your inherited IRA.
RMD's are generally subject to federal income tax and may be subject to state taxes. Consult your tax advisor to assess your situation.
Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of John McCaffery and not necessarily those of Raymond James.
