Getting an inheritance, especially an IRA, might feel like a win at first. But, the tax rules attached to it? They can get complicated fast. Make one wrong move, and it could cost you.
In our latest video, we’re discussing the key rules you need to know about inherited IRAs, including the 10-year distribution rule and the exceptions that might apply.
Before you make any decisions about your inherited IRA, take a few minutes to watch the video. It could save you time, money, and a lot of unnecessary stress down the road.
Questions? Reach out to us at info@solidaritywealth.com or call 385-374-1665 to schedule a discovery call.
Transcript
Hello and welcome. I’m Lynn Evans, Tax Advisor and Director of Family Office Services at Solidarity Wealth. Today I’m going to give you an overview of some of the key tax rules for inherited IRAs.
Understanding how these rules work can save you time, stress, and money, because inheriting an IRA isn’t just free money.
The rules about how you can access the IRA and the taxes that you may owe are very complex and made more so by congressional legislation and IRS regulations over the past six years.
Let’s talk about some of the most important rules.
How Traditional and Roth Inherited IRAs Are Taxed
First, let’s look at a quick summary of some of the key things you need to know about inherited IRAs. Remember, withdrawals from traditional IRAs are typically taxed on the full amount of the withdrawal, while Roth IRA withdrawals are generally tax-free. This general rule applies to inherited IRAs as well.
Understanding Required Minimum Distributions (RMDs)
Second point, Congress does not want IRAs to last forever, so they require you to take out distributions, conveniently called required minimum distributions (or RMDs). These distributions are intended to move the assets from an IRA, including any growth over time, back to the original owner during his or her calculated life expectancy. For inherited IRAs, your relationship to the original IRA owner determines the amount and timing of these distributions.
Spousal vs. Non-Spousal Inheritance Rules
For example, if you’re a spouse inheriting an IRA, you typically have more options for how and when to take withdrawals compared to non-spousal beneficiaries. Up until 2019, there were many ways for an individual inheriting an IRA to stretch these payments beyond the expected life of the original owner, and often far beyond the original life. However, beginning with the SECURE Act in 2019, Congress substantially eliminated these options, creating in their place the 10-year rule.
Overview of the SECURE Act and the 10-Year Rule
For most non-spousal beneficiaries inheriting an IRA from someone who died after 2019, this 10-year rule requires that the entire inherited IRA must be fully distributed within 10 years of the original owner’s death. This 10-year rule is what I want to focus on for this video. As I mentioned, it primarily affects non-spouse beneficiaries who inherit an IRA from someone who passed away on or after January 1st, 2020.
When the 10-Year Rule Applies
If you’re one of these beneficiaries, this rule simply states that you must distribute the entire balance of the inherited IRA within 10 years of the original owner’s death. Whether or not you’re required to take annual RMDs during this period of time depends largely on whether the original owner was required to take them before he or she died. However, even if you don’t have to take RMDs, this doesn’t mean you’re exempt from withdrawing the funds before this 10-year period is up.
Applying the Rule to a 2024 Inheritance
That part is still required. Again, if you’re a non-spousal beneficiary of an inherited IRA account that you receive in 2024, you must withdraw the entire account by December 31st, 2034, 10 years from last year. Of course, there are exceptions to the 10-year rule for certain IRA beneficiaries.
Exceptions for Eligible Designated Beneficiaries
This would include the original owner’s surviving spouse, any beneficiary who is disabled or chronically ill, any other individual who is not more than 10 years younger than the deceased, and also a child of the deceased who has not reached the age of majority. Any of these individuals, these beneficiaries, can take distributions over their own life expectancy, potentially stretching out the tax burden over a much longer period. One thing to know here, for purposes of this rule, regardless of what the state law says, an individual is considered a minor child of the decedent until he or she reaches age 21.
Rules for Minor Children Beneficiaries
At that point, the beneficiary continues to take these RMDs, but they must distribute the entire IRA balance within 10 years of the year they turn age 21. The bottom line is that inherited IRA rules can be very tricky, so before you make any decisions, we encourage you to talk to a qualified financial professional.
If you’re ready to know how inherited IRA tax rules apply to you, please reach out to us at info@SolidarityWealth.com or call 385-374-1665 to schedule a discovery call.
We look forward to speaking with you.
