The rules surrounding inherited Individual Retirement Accounts (IRAs) have undergone significant changes, thanks to the SECURE Act of 2019 and subsequent updates. These changes are reshaping how beneficiaries can access retirement funds and manage their tax liabilities. If you are a beneficiary of an IRA or managing assets for clients, it’s essential to understand these new regulations and how they might impact your financial planning.
What’s an RMD?
A Required Minimum Distribution (RMD) is the minimum amount that must be withdrawn annually from certain retirement accounts, including traditional IRAs, once the account holder—or in the case of inherited IRAs, the beneficiary—reaches a specific age or inherits the account. RMDs are mandated by the IRS to ensure that retirement funds are eventually taxed rather than left to grow tax-deferred indefinitely.
New Rules for Inherited IRAs
1. The SECURE Act and the 10-Year Rule
Prior to the SECURE Act, those who inherited an IRA through a parent or grandparent could pay taxes and withdraw distributions based on their life expectancies. This became known as a “stretch” IRAs, which were particularly beneficial for younger beneficiaries who could benefit from decades of compounded growth while managing their tax burden due to lower annual distributions. However, the SECURE Act eliminated this option for most non-spouse beneficiaries. Instead, beneficiaries must now deplete the inherited IRA within 10 years of the account holder’s death.
While this rule provides flexibility in terms of when withdrawals can occur within that 10-year period, it significantly alters the tax landscape by accelerating the distribution timeline. As a result, beneficiaries may face a larger tax bill in the years ahead if they have not taken RMDs in prior years, as larger withdrawals could push them into higher tax brackets.
2. Exceptions to the 10-Year Rule
There are some important exceptions to this rule. According to Barron’s, surviving spouses, for example, can still treat the inherited IRA as their own and delay distributions until they reach their required RMD age, which allows continued tax-deferred growth. Minor children of the decedent can take distributions over their lifetime, but once they reach the age of majority, the 10-year rule applies. Additionally, beneficiaries who are chronically ill, disabled, or not more than 10 years younger than the decedent are exempt from the 10-year rule and can continue taking distributions based on their life expectancy.
3. Required Minimum Distributions (RMDs)
According to the Wall Street Journal, while the SECURE Act shifted to a 10-year withdrawal period for most non-spouse beneficiaries, required minimum distributions (RMDs) must begin in 2024 for IRAs inherited in 2020 or later. This means that starting in 2024, non-spouse beneficiaries will have to begin taking annual RMDs based on their life expectancy, which will further increase their taxable income.
4. Tax Implications
These changes bring about significant tax implications. With the 10-year rule in place, beneficiaries may need to make larger withdrawals to meet the requirement, which could push them into higher income tax brackets. Additionally, RMDs will further increase taxable income annually, making it essential for beneficiaries to carefully manage their distributions and tax strategies.
5. Strategic Planning for Beneficiaries
Given the recent changes to inherited IRA rules, it’s more important than ever for beneficiaries to work closely with financial and tax advisors to develop personalized strategies that minimize long-term tax exposure. The timing and size of annual withdrawals are critical, especially for those subject to required minimum distributions (RMDs) or the 10-year distribution rule.
Effective planning may involve spreading withdrawals evenly over the 10-year period to avoid large, lump-sum distributions that could push you into a higher tax bracket. In some cases, it may make sense to coordinate IRA distributions with years of lower income, retirement, or other deductions to help offset the tax burden.
Take the Next Step Toward Confident Financial Planning
At Konza Wealth Group, we offer personalized, professional financial services. Contact us for more information on how these IRA changes may impact your financial future. Understanding them now will allow for better planning and fewer surprises later.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Konza Global Advisory, LLC in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.
Frequently Asked Questions
Who is affected by the new 10-year rule for Inherited IRAs?
Most non-spouse beneficiaries who inherit an IRA from someone who passed away after December 31, 2019 are subject to the 10-year rule. This includes adult children, grandchildren, and other non-eligible beneficiaries who can no longer stretch distributions over their lifetime. Certain Eligible Designated Beneficiaries are exempt and may use lifetime payout rules.
Do I have to take RMDs during the 10-year period?
If the original IRA owner died on or after their Required Beginning Date start date, the beneficiary must take annual RMDs for years 1-9 after inheritance and fully empty the account by the end of year 10.
If the original IRA owner died before reaching their Required Beginning Date(RBD) start date, annual RMDs are not required; the beneficiary can choose how much to withdraw each year, as long as the account is fully distributed by the end of year 10.
The 10-year RMD rule does not apply to “Eligible Designated Beneficiaries” (EDBs), who are allowed to use the old “stretch” IRA rules to spread distributions over their lifetime. EDBs include:
- A surviving spouse
- A minor child (until age 21) of the decedent
- A disabled or chronically ill person
- A beneficiary less than 10 years younger than the deceased account owner
All other non-spouse beneficiaries who inherit from someone who died after December 31, 2019, and are not in the “EDB” categories generally must now take annual RMDs if the owner died after beginning RMDs, under the finalized rule.
**The 10-year period for full distribution begins at the end of the year of the owner’s death.
What happens if I don’t take the RMDs?
If someone is required to take an RMD from an inherited IRA or their own and fails to take it, the IRS imposes a penalty tax on the amount that should have been withdrawn.
Current IRS rule:
- Penalty: 25% excise tax on the missed RMD amount
- Reduced to 10% if the mistake is corrected in a timely manner (generally by filing and taking the withdrawal before the IRS contacts you)
**IRS has granted temporary relief for missed inherited RMDs during the SECURE transition period, but full enforcement resumes in 2025 under final regulations.
The information contained in this writing should not be construed as financial or investment advice on any subject matter. Konza Global Advisory, LLC expressly disclaims all liability regarding actions taken based on any or all the information in this writing.
