After several years of uncertainty, the IRS has finally clarified the SECURE Act rules regarding Required Minimum Distributions (RMDs) for inherited IRAs and the timeframe for final distribution of these assets to designated beneficiaries.
Even so, the rules are very convoluted, and depend on a number of factors:
- When the original IRA owner passed away: The SECURE Act provisions only apply to inherited IRAs originally owned by people who passed away in 2020 or later.
- Whether the inherited accounts are Traditional or Roth IRAs.
- Whether the owner had started taking RMDs before they passed on.
- Whether designated beneficiaries meet “eligibility criteria” that may give them greater flexibility in choosing distribution options.
The rules become even more complicated when the beneficiaries are trusts or charities or a designated beneficiary inherits the remainder of an IRA that was originally inherited by someone else. This article only discusses provisions applicable to designated human beneficiaries who inherit IRAs from the original account owner.
Greater flexibility for eligible beneficiaries
Eligible designated IRA beneficiaries may be able to take advantage of more flexible transfer, distribution and RMD options when they inherit these accounts. These beneficiaries include:
- spouses;
- children under 21 (the rules change when they turn 21);
- chronically ill or permanently disabled children; and
- beneficiaries less than 10 years younger than the original IRA owner.
Options for eligible beneficiaries will be discussed in a future article.
In the meantime, the flow chart below can help you determine the distribution and/or RMD requirements for Traditional or Roth IRAs you may inherit or intend to pass on to your own designated beneficiaries.
RMDs or not RMDs?
The main outstanding question the IRS finally answered was whether annual RMDs are mandatory for all inherited IRAs that must be depleted within 10 years of the owner’s death.
The answer? Annual RMDs are not required for inherited Roth IRAs.
For inherited Traditional IRAs, annual RMDs are required over the 10-year period if:
- The designated beneficiary(ies) doesn’t meet eligibility requirements.
- The deceased IRA owner had already started taking RMDs or had reached the age where they would have had to start taking RMDs.
If an inherited Traditional IRA requires annual RMDs, the IRS won’t require beneficiaries to start taking them until 2025, even if the original account owner died between 2020 and 2024. Nor will beneficiaries have to take retroactive RMDs for previous tax years. However, it's important to keep in mind that the "10-year cleanout clock" still begins the year the owner died, not in 2025.
Of course, an IRA beneficiary can always take larger distributions than those that are required or fully empty out the inherited account before the 10-year period ends.
However, taking RMDs or elective distributions may create certain unfavorable tax consequences for designated Traditional IRA beneficiaries. Account owners and inheritors may wish to consult with a tax professional or their financial advisor to better understand these tax issues and consider strategies for reducing their potential impact.
This material has been provided for general informational purposes only and does not constitute financial advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax professional or a financial advisor before making any IRA-related distribution or conversion decisions.
This article was authored by Michael Flaherty and Jeffrey Briskin. Michael is a senior financial advisor with Canby Financial Advisors, a SEC-registered investment adviser. SEC registration does not constitute an endorsement by the SEC nor a statement about any skill or training. Michael can be reached at 508.598.1082 or mflaherty@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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