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The IRS has announced that in 2024, beneficiaries of Individual Retirement Accounts (IRAs) do not have to take the annual required minimum distributions (RMDs) for the fourth consecutive year, following the rules of the SECURE Act. This Act, enacted in late 2019, eliminated the Stretch IRA and requires beneficiaries to fully distribute the inherited IRA within 10 years, with exceptions. The proposed regulations issued by the IRS in early 2022 added complexity by requiring beneficiaries to continue RMDs for the first nine years before fully distributing the IRA by the end of the tenth year, but this rule only applies to inherited traditional IRAs.

However, tax practitioners have objected to the proposed regulations, stating that they are inconsistent with the SECURE Act and unnecessarily complicate the process of inheriting traditional IRAs. The IRS has not finalized these regulations, and in Notice 2024-35, they announced they would waive penalties for beneficiaries who fail to take any RMDs in 2024 under the terms of the proposed regulations. This waiver does not apply to any other types of RMDs, and the 10-year rule still holds.

The IRS expects the regulations to not be effective before 2025. Even though penalties may be waived, beneficiaries are still advised not to delay distributions from an inherited traditional IRA. Full distribution of the IRA must be completed by the end of the tenth year, regardless of any changes to the regulations by the IRS. Failing to take distributions in the first nine years will require the entire IRA to be distributed in year 10, including paying income taxes on the amount, potentially resulting in a higher tax bracket and reduced inheritance.

To navigate the distribution of an inherited traditional IRA, beneficiaries are advised to develop a 10-year plan. This may involve distributing the entire IRA immediately, taking annual distributions over 10 years to spread out income and taxes, or letting the income and gains compound and distributing the full amount in year 10. Some beneficiaries may consider taking qualified charitable distributions from the inherited IRA once they reach age 70½ and are charitably inclined.

While Roth IRAs also follow the 10-year rule, there are no RMDs during the first nine years, and distributions are tax-free. This simplifies the decision-making process for beneficiaries of Roth IRAs, but it is still important to plan distributions strategically to maximize tax benefits and ensure compliance with the SECURE Act rules. Overall, beneficiaries of both traditional and Roth IRAs should carefully consider their options and potential tax implications when developing a distribution strategy.

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