The IRS has waived some Inherited IRA RMDs for 2024, marking the fourth year that this has been done. This waiver applies to those on the 10-year Inherited IRA schedule, allowing them to skip RMDs without facing penalties. However, this may not be the best long-term tax plan, as skipping RMDs now could mean larger tax bills in the future. The 10-year rule for Inherited Retirement Accounts states that the entire Inherited IRA balance must be withdrawn by the end of the 10th year after death, replacing the stretch IRA strategy that was eliminated in 2020.
There are exceptions to the 10-year rule for eligible designated beneficiaries who may still use a stretch IRA and are not subject to the 10-year rule. The IRS has proposed additional regulations requiring beneficiaries who inherit IRAs from those who died after reaching their required beginning date to take annual RMDs for years one through nine of the 10-year rule term. This provision has been controversial and confusing, leading the IRS to waive these RMDs for the fourth consecutive year. It is important to note that not taking RMDs could result in larger ones in the future, increasing the overall tax burden on the inheritance.
Inherited Roth IRAs are not subject to RMDs in years one through nine under the 10-year rule, regardless of the deceased’s age. This means that the funds in an Inherited Roth IRA can continue to grow tax-free and be withdrawn tax-free in the future. However, if there is a need to max out Roth 401(k) and Roth IRA contributions each year, it may be beneficial to withdraw enough funds from the Inherited Roth IRA to make these contributions. This allows for more tax-free compounding growth in the accounts over the 10-year period.
While skipping RMDs may seem like a good short-term tax plan, it may not be the best long-term strategy for managing an Inherited IRA. Depending on the size of the Inherited IRA and overall household income, withdrawing from the account this year, even if not required, may be beneficial. Spreading out withdrawals over the 10-year period can help avoid pushing income into higher tax brackets. However, individual financial situations and estimated future income should be considered before making any withdrawal decisions.
In conclusion, the IRS has waived some Inherited IRA RMDs for 2024, providing beneficiaries on the 10-year Inherited IRA schedule the opportunity to skip withdrawals without penalties. While this may seem like a short-term benefit, skipping RMDs could lead to larger tax bills in the future. Understanding the 10-year rule for Inherited Retirement Accounts and the exceptions to this rule, such as eligibility for designated beneficiaries, is crucial for managing Inherited IRAs effectively. For those with Inherited Roth IRAs, the ability to withdraw tax-free funds over the 10-year period provides opportunities for tax-free growth and contributions to other retirement accounts. Overall, careful consideration of individual financial situations and long-term tax planning strategies is essential when managing Inherited IRAs.
