Inherited Individual Retirement Accounts under SECURE 2.0

12-06-2024RetirementKevin Boudreau

The Internal Revenue Service (IRS) issued final rules earlier in 2024 for the SECURE Act of five years ago related to inherited individual retirement accounts (IRAs).

The IRS confirmed that most beneficiaries must take annual Required Minimum Distributions (RMDs) throughout the 10 years, with the account fully depleted by the end of the tenth year.  The RMD amount each year can vary based on several factors, including the beneficiary's age, relationship to the deceased, and the value of the inherited account.

This new guidance on inherited IRAs, set to take effect in 2025, addresses a key question that has puzzled many advisors and beneficiaries since the passage of the original SECURE Act.

But under the IRS interpretation of the SECURE Act, if your parent died on or after the date he or she was required to take minimum distributions, you must take RMDs based on your life expectancy in years one through nine and deplete the balance in year 10.  Basically, once the original owner has started taking RMDs, you can’t turn them off although the IRS doesn’t require you to withdraw the same amount as your parent would have been required to withdraw.

The IRS has delayed implementation of the final rules governing inherited IRA RMDs until 2025. This means some beneficiaries of inherited IRAs will have more time to adapt to distribution requirements.  The IRS will waive penalties for RMDs missed in 2024 from IRAs inherited in 2023, where the deceased owner was already subject to RMDs. (With previous IRS relief, penalties are waived for missed RMDs from specific IRAs inherited in 2020, 2021, 2022, and 2023.)

Inherited IRAs: Calculate how much to withdraw

If you’re required to take a minimum distribution from an inherited IRA, use the factor in the IRS Single Life Expectancy Table (you can find it in IRS Publication 590-B) to figure out how much you must withdraw.  You’ll use the factor for your age this year and the balance of the IRA at the end of the previous year to calculate your distribution.

Of course, you can withdraw more than the minimum.

Roth IRAs

The 10-year rule also applies to inherited Roth IRAs, but with an important difference: You are not required to pay taxes on the Roth IRA withdrawals, and you don’t have to take RMDs because the original owner didn’t have to take them, either. That gives you plenty of flexibility with respect to withdrawals, but if you can afford to wait until year 10 to deplete the account, you’ll enjoy more than a decade of tax-free growth.

Exceptions to the rules

It's also important to note that rules vary for certain beneficiaries. The following "eligible designated beneficiaries" are generally exempt from the 10-year rule:

  • Surviving spouses
  • Disabled or chronically ill individuals
  • Minor children (under age 21)
  • Beneficiaries not more than 10 years younger than the deceased
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