Inherited IRAs: How the 10-Year Rule has an Impact on Required Minimum Distributions in 2025

The Internal Revenue Service (IRS) recently delayed its proposed 10-year rule that will impact inherited Individual Retirement Accounts (IRAs). IRAs are great for growing tax-deferred money. However, as the term implies, taxes are delayed, not avoided. The IRS requires account holders to start withdrawing the money once they reach a certain age as required minimum distributions (RMDs). Non-spouse IRA beneficiaries are also subject to RMDs. Since younger beneficiaries have longer life expectancies, they benefit from smaller distribution amounts, often called a stretch IRA.

The delayed rule will require IRA beneficiaries to drain the account within a 10-year time frame starting in 2025, eliminating the stretch IRA. Based on PlanSponsor’s article “Inherited IRA RMD Final Rules Postponed to 2025,” this article unpacks RMDs, transition relief and how the 10-year rule might impact your estate planning.

What are Required Minimum Distributions?

Tax-deferred account holders must pay taxes on their contributions and earnings once they turn a certain age. RMDs are the smallest amount the account holder has to take every year.  However, they are welcome to take higher distributions if they wish. Younger beneficiaries calculate their RMDs based on a longer time frame, stretching distributions over their lifetimes, called a stretch IRA.

What Do I Need to Know about IRS Transition Relief?

In 2019, the Setting Every Community Up for Retirement Enhancement Act created the 10-year rule impacting the beneficiaries of estate owners who passed away before 2020. The IRS recently deferred enforcement until 2025, extending transition relief for heirs. This extension follows previous relief granted for the years 2020 through 2023. Notably, the IRS anticipates 2024 as the final year of such relief. Once the 10-year rule regulations are approved, non-compliance may trigger significant penalties, including a 25% excise tax on the undistributed balance or a 10% penalty if rectified within two years.

Strategic Estate Planning: Considerations  for an Inherited IRA

The impending 10-year rule makes strategic estate planning paramount for IRA beneficiaries and estate owners. Understanding the evolving regulatory landscape empowers individuals to navigate inherited IRA distributions effectively. Key considerations include:

• Review your beneficiary designations with the 10-year rule in mind to align with your current estate planning goals.
• Explore tax-efficient distribution strategies to mitigate the impact of IRA distributions on your overall tax liability.
• Work with an experienced estate planning attorney to craft tailored strategies that optimize wealth preservation and tax planning.

Key Inherited IRA Takeaways:

• Inherited IRAs: IRA beneficiaries are subject to RMDs.
• Understand IRS Transition Relief: Estate planning strategies can make the most of extended transition relief.
• Strategize Your Estate Plan: Estate owners can review named beneficiaries, maximize tax efficiency and seek guidance.

Conclusion

Navigating the complexities of inherited IRA RMDs demands foresight and informed decision-making. Work with an estate planning attorney to leverage strategic planning and safeguard your financial legacy.

Reference: PlanSponsor (April 18, 2024) “Inherited IRA RMD Final Rules Postponed to 2025”