If you’ve inherited an IRA in the past four years, and the deceased was of the required minimum distribution age, hopefully, you’ve already been taking your own RMDs. If you haven’t, talk to your financial or tax advisor on the double, so you can avoid a “tax bomb” in a decade.

Recently, the IRS and Treasury Department finally released final regulations for RMDs. According to these rules, if the person who died was of RMD age, the beneficiary will have to start taking distributions that would satisfy the required amount.

So, if the deceased would have been taking or would have started taking RMDs, and you inherited the account, you must take the RMD to stay in compliance with tax law.

Inherited IRAs after 10 Years

These distributions might not empty that inherited IRA by the end of the 10 years of your owning it. In that case, you would need to increase the amounts taken over the 10-year period or take a larger sum in the 10th year to zero out the balance.

The finalized rules say that certain parts of the Secure Act require “non-eligible beneficiaries” (more on that in a moment) who inherited IRAs in 2020 or later to transfer all that money into their income within 10 years.

Starting Jan. 1, 2025, most non-spousal beneficiaries must take an RMD from their inherited IRA if the deceased was of RMD age. These rules are retroactively applied to accounts inherited in 2020 and beyond, when the SECURE Act took effect.

Exceptions to the Rule

But there are exceptions because it’s the government so of course there are. These exceptions apply to eligible designated beneficiaries, which include:

  • Spouses of IRA owners who died
  • Heirs who are disabled or have a chronic illness
  • Heirs who are younger than the deceased IRA owner by a decade or less
  • Heirs who are 20 years old or younger

Contentious Provision

The IRS also doubled down on a contentious provision. That provision says most beneficiaries are held to the decade rule even if the IRA owner died on or after the start of their own RMD timeframe.

Consider Converting to a Roth IRA Now

If you own an IRA now, you could avoid the tax hit to your heirs by converting traditional accounts to Roth IRAs. Your beneficiaries would still have to follow the 10-year rule, but they probably wouldn’t have the tax issue since you’d have paid the taxes upfront. It’s not for everyone, but it might be the best solution for those who can pay those taxes on the front end.

Although there aren’t a whole lot of tax strategies to reduce the tax burden once someone starts taking their RMDs, qualified charitable distributions or maximizing other deductions could help.

If you need help with your RMDs, IRAs, or the IRS, let us know.