Last week, the IRS issued a determination regarding Inherited IRAs, specifically addressing the requirement for Required Minimum Distributions (RMDs). As the rules become increasingly complex, we want to highlight an important detail that account owners should be aware of.
To recap, for those who inherited an IRA after January 1, 2020, a new withdrawal rule known as the 10-year rule was implemented. This rule mandates that beneficiaries of inherited IRAs must withdraw the entire balance within 10 years, starting the year after the original account owner’s death. There are exceptions to this rule, including inheriting assets from a spouse, if the beneficiary is disabled, chronically ill, a minor, or within 10 years of the decedent’s age. Initially, there was significant confusion, as many believed there were no RMD requirements and that they simply had a 10-year window to withdraw all assets from the account. Due to this confusion, the IRS waived the RMD requirement until a final determination was made.
As of last week, the IRS determined that “non-eligible designated beneficiaries” must start taking RMDs from their inherited IRAs beginning in 2025 if the deceased was already in RMD status. If the deceased had not yet begun their RMDs due to being younger than the qualifying age, these beneficiaries can still follow the 10-year rule without the annual RMD requirement.
The complexity of this rule can lead to various outcomes, as illustrated in the chart below.
(Source: X formerly Twitter)
Key Takeaway: If you have an inherited IRA from a decedent who passed away in 2020 or later, you may be required to start taking RMDs beginning in 2025. Missing an RMD can result in a 25% tax penalty on the amount you were supposed to withdraw.
If you have any questions about this rule or think it might affect your financial situation, we recommend discussing it with your advisor or tax consultant.
Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser
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