Retirement

IRA Heirs Can Delay RMDs Another Year, But Should They?

The IRS recently announced that in 2024, for the fourth consecutive year, IRA beneficiaries don’t have to take the annual required minimum distributions (RMDs) described in the proposed regulations interpreting the 10-year rule of the SECURE Act.

Recall that in late 2019 the Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted.

One of its many provisions was to eliminate the Stretch IRA. With few exceptions, those who inherit an IRA after 2019 must fully distribute the IRA within 10 years. That applies to both traditional and Roth IRAs.

In early 2022, the IRS proposed regulations that greatly complicated the situation for beneficiaries.

Under the regulations, if the deceased IRA owner was taking RMDs, the beneficiary must continue the RMDs for the first nine years after inheriting and then fully distribute the IRA by the end of the tenth year.

That proposed RMD rule would apply only to inherited traditional IRAs, since the original owner of a Roth IRA doesn’t have RMDs.

Of course, a beneficiary can take distributions that exceed the RMDs and distribute the entire IRA anytime within the 10 years.

The IRS hasn’t finalized the proposed regulations, and many tax practitioners have objected that the provision is inconsistent with the wording of the SECURE Act and unnecessarily complicates the process of inheriting traditional IRAs.

In recently-issued Notice 2024-35, the IRS again said it would waive penalties on beneficiaries who fail to take any RMDs mandated in 2024 under the terms of the proposed regulations.

In previous years, the IRS said it would waive penalties for any such RMDs not taken in years 2021-2023. The waivers don’t apply to any other types of RMDs, and the 10-year rule still applies.

In the latest announcement, the IRS said it expected the regulations won’t be effective before 2025.

The waiver doesn’t mean it’s a good idea to delay distributions from an inherited traditional IRA.

The full balance must be distributed by the end of the tenth year, even if the IRS doesn’t finalize the regulations or finalizes them by eliminating the RMDs for years one through nine.

If you don’t take distributions during years one through nine, you’ll have to distribute the entire IRA in year 10, include that amount in gross income, and pay income taxes on it.

The combination of the IRA distribution and your other sources of taxable income could push you into a higher tax bracket and reduce your after-tax inheritance.

The best strategy after inheriting a traditional IRA is to develop a 10-year plan for distributing the IRA.

Do you want to distribute the entire IRA now? Do you want to take a portion each year for 10 years, spreading out the income and taxes?

If your income and deductions fluctuate, you might want to evaluate the situation each year. Or you can let the income and gains compound in the IRA for 10 years and distribute the entire amount in year 10.

Another potential strategy for some beneficiaries is to wait until they turn age 70½ and then take qualified charitable distributions from the inherited IRA. This is feasible if the beneficiary will turn 70½ within the 10-year period and is charitably inclined.

Remember, you still have to follow the 10-year rule when a Roth IRA is inherited. But there are no RMDs during years one through nine for the Roth IRA and the decision of when to take distributions isn’t as complicated because the distributions are tax free.

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