The Fourth Consecutive Year of Inherited IRA Adjustments

It’s time we dust off our annual “Inherited IRA Change” article. Last year, Jeff DeHaan summarized the IRS refinement of what the 10-year distribution rule actually entails and to which accounts it applies in this article. I recommend reading Jeff’s article as the rule itself has not been changed, but I will briefly summarize:

Most Individual Retirement Accounts (IRAs) inherited from non-spouses post January 1, 2020 must be fully distributed within 10 years of receiving. During those 10 years, the beneficiary is required to take a distribution every year, and cannot simply take a lump sum in year 10.

The change for 2024 is that the penalty for missed Required Minimum Distributions (RMDs) in 2024 will be waived similarly to 2023. There will be no penalty owed in 2025 if a distribution is not taken in 2024 from an inherited IRA subject to the 10 year rule.

While this increased flexibility in withdrawal options is appreciated, it may be advantageous to still take a distribution in 2024 if you are not required to do so. Even though the penalty is waived, the 10 year clock for distributions is still running. For example, if you inherited an IRA in 2023, it must be liquidated by 2033, as an extra year is not provided as part of this IRS relief. This means forgoing distributions in one year will likely lead to larger distributions later on, potentially resulting in a higher total tax bill.

The decision of if, when, and how much your inherited IRA distribution should be continues to be a nuanced calculation. Factors including your income, spending, and dynamic of your balance sheet need to be considered. Beyond those personal considerations, we expect income tax rates to change in the future, further complicating the equation. Contact the CCP planning team or your advisor to create a tax efficient withdrawal strategy that aligns with your goals.