Summary of Final Ruling
In July 2024, the IRS released the final ruling for the Required Minimum Distribution (RMD) schedule of inherited IRAs (typically children inheriting their parent’s IRA) AFTER January 1, 2020. The results were not shocking and in line with expectations. Moving forward, years the required distributions in years 1-9 will be based on the old “stretch” IRA rules… the beneficiaries will calculate these RMDs based on their own age in the year after death. The inherited IRA will have to be fully depleted by the end of the 10th year.
What Did Not Change
This law does not affect any IRA beneficiaries who inherited an IRA in 2019 or before. These IRA beneficiaries are still under the “old” stretch IRA provision which is more helpful/flexible from an income taxation perspective. This means that they can stretch the RMDs over their lifetime based off the age of the beneficiary. The relief only applies to those beneficiaries who inherit after December 31, 2019 and who were originally subject to annual RMDs within the 10-year period.
The Waiver For 2021 - 2024
There was so much confusion when those proposed rules were first released that the IRS waived annual RMDs for the past four years (2021-2024). But now these RMDs must be taken beginning in tax year 2025. The waived RMDs do not have to be made up, and there will be no penalty for failing to take them.
Following the New RMD Rule Can Lead To Bad Tax Optimization
Now that you know the rules… ignore them! Well, kind of. Let us explain.
We believe the key to good income tax planning is to pay the lowest amount of taxes over your lifetime. The problem for many retirees is the “minimum” mentality, which leads some owners of an inherited IRA to take only the required amount each year. Beneficiaries subject to the “new” 10-year rule should consider taking more than the required amount to take advantage of their low marginal income tax brackets (like the 12% or 22% brackets depending on the size of the inherited IRA). Taking more income each year and spreading the income over the 10 years may smooth out the income, potentially resulting in a lower overall total income tax paid.
With that being said, there are a number of personal situations where that logic might not apply. For example, the person who inherits a beneficiary IRA but is still in a high-income tax bracket due to vocational income. A lot of times, it can make sense to minimize the taxable income from RMDs if the beneficiary is planning to retire 2-4 years after inheriting the IRA as their taxable income will typically move lower in retirement.
Conclusion
Taking the minimum RMD each year and putting off the large distribution until the end of your 10-year required period could mean a much larger income tax bill when the distribution has to be made. This is a very important tax planning topic that needs to be addressed. We cover this type of income tax planning and more as we prepare our Live Well Plan for clients that we serve.
Are you confused or looking to review your Beneficiary IRA tax optimization strategy? Give us a call.
About the Author
Matt Price serves as a Partner and Managing Director for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their four children and "Fisher" the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 12 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes everyone needs a wealth coach!
Content Is Nothing Without Context
Are you looking for a weekly financial market commentary that provides context? Click here to sign up for our weekly newsletter. We are helping make the complex simple.
The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates. All opinions are subject to change without notice. Neither the information provided, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.
Steward Partners and its Wealth Managers do not offer tax advice; investors should consult their tax advisors before making any tax-related investment decisions.
AdTrax 6555474.9 Exp 07/25