A couple of months ago, the IRS released its final regulations on Required Minimum Distributions (RMDs) for retirement accounts like 401ks and IRAs. Given the age (reaching retirement) and wealth of the baby boomer generation, this is a timely topic. Many of you reading this will need to follow these new rules, especially if you inherit an IRA.
The original SECURE Act of 2019 introduced the “10-Year Rule.” This rule says that non-spouse beneficiaries (like adult children) must withdraw all money from an inherited IRA within 10 years of the original owner’s death. This seems simple, but there are a few details to consider:
- If the original owner dies after they’ve started taking distributions, the beneficiary has to take yearly withdrawals, and the account must be completely distributed by the end of the tenth year.
- If the original owner dies before they’ve started taking distributions, the beneficiary doesn’t need to take yearly withdrawals, but the account must still be fully distributed by the end of the tenth year.
In our experience, these dynamics can have a large impact on tax strategy for the beneficiary. The money withdrawn is treated as regular income, which often happens during the beneficiary’s peak earning years, like in their 50s. Translation: they often hit at the highest marginal tax bracket of a person’s lifetime.
The goal of tax planning is to follow IRS rules while managing when you pay taxes – preferably NOT when our dollars are subject to high marginal tax brackets. This is where planning comes into play and strategies like charitable giving or Roth conversions can help with traditional IRAs. As many of our readers know, we are deep in the weeds on tax strategies like this on a regular basis. Reach out if you’d like to hear more.
In the meantime, click here to view our Inherited IRA flowchart if you are interested in ALL the messy details. It covers a lot more nuance than this article addresses.
