Navigating Inherited IRAs: How the New IRS Notice Could Benefit You

Brad Shermeto, CPA, CFP

[email protected]

Spring of 2024 brought good news for beneficiaries of inherited IRAs.

It arrived on April 16 via IRS released Notice 2024-35. This notice provides relief to beneficiaries of certain inherited IRAs who have a 2024 required minimum distribution (“RMD”) requirement under the “10-year rule” of the SECURE Act of 2019 (the “Act”).

The Act included changes to the way RMDs are handled. These changes included increasing the RMD age from 70.5 to 72 (beginning in 2020); allowing penalty-free withdrawals up to $5,000 from IRAs for birth and adoption costs; and implementing a “10-year rule” for distributions from certain inherited IRAs.

What is the 10-Year Rule?

The 10-year rule applies to inherited IRAs with account holders dying after December 31, 2019.

Aside from the exceptions provided below, under this new rule the entire balance of the account must be distributed by the 10th calendar year after the calendar year of the account holder’s death.

The IRS issued proposed regulations stating that, in addition, annual RMDs were required in each of the years prior to the distribution of the entire balance. Under the prior “5-year rule,” total distributions could be made in the fifth/final year without the need for annual RMDs, thus postponing the recognition of income until the final year.

The new distribution requirements under the 10-year rule were met with criticism; the IRS then issued Notices that waived annual RMDs for tax years 2021, 2022, and 2023. The latest IRS Notice extends the waiver of annual RMDs to tax year 2024 for beneficiaries who are subject to the “10-year rule”.  The IRS anticipates final regulations to be issued in early 2025.

Exceptions to the 10-Year Rule

The new 10-year rule does not apply to the following eligible designated beneficiaries (EDBs):

  1. Surviving Spouse
  2. Children younger than the age of majority (usually 18 years of age)
  3. Individuals with disabilities
  4. Chronically ill individuals
  5. Individuals who are less than 10 years younger than the plan participant

RMDs Effect on Your Tax Liability

RMDs can cause a significant increase in your annual tax liability, so it is important to make sure you plan ahead.

If the IRA contributions were fully tax-deductible when you made them, then the entire RMD will be taxed as ordinary income in the year received. If you made nondeductible contributions, then you can use form 8606 to calculate the amounts that will not be subject to income tax. And it is essential to make sure that adequate RMDs are made in order to avoid additional taxes.

If you have any questions about RMDs or think you are eligible for relief, please contact your Louis Plung & Company Tax Advisor.

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