If you’re expecting to inherit an IRA, you may be surprised by how the latest changes to the IRS’s inherited IRA regulations could affect what you receive. These new rules, effective July 19, 2024, mark a significant shift in how wealth is passed down, and unfortunately, they don’t benefit most beneficiaries.
What does this mean for you? The flexibility to stretch out IRA distributions over time—once a valuable tax advantage—is gone. Instead, these changes could result in more of the money being lost to taxes, leaving you with less of the wealth your loved one intended for you.
What the New Inherited IRA Rules Cover
Inherited Roth IRAs, while still subject to the 10-year full distribution rule, are not required to have annual RMDs during years 1 – 9 under the new regulations. In other words, Roth IRAs (inherited) ARE subject to the new regs, they just don’t require annual RMDs during the 10-year period like Traditional Inherited IRAs do.
The original SECURE Act unintentionally forced many beneficiaries to take inherited IRA distributions within 10 years, eliminating the option to stretch distributions over their lifetimes. SECURE 2.0, while not addressing this issue, raised the minimum age for required minimum distributions to 73, with plans to increase it to 75 in 2033.
The 10-Year Rule
Under the new regulations, “stretch IRA” strategies are no longer possible in most cases. Those strategies allowed for tax-deferred invested growth over an extended period. Now, however, new inherited IRA rules put a 10-year cap on required distributions.
Non-spousal beneficiaries who inherited IRAs on or after January 1, 2020, must withdraw all the funds within 10 years after the benefactor’s death. This rule will take effect in 2025, so you have some time to prepare for it until then.
For example, if you’re a non-spousal beneficiary of an inherited IRA account you attained in 2022, you must withdraw the entire account by 2032.
The 10-year rule doesn’t apply to “eligible designated beneficiaries.” Surviving spouses can still observe the older distribution rules. Minor children can still stretch out their distributions until they turn 18 years old, after which the 10-year rule will be activated.
Disabled and chronically ill beneficiaries can take their distributions based on their life expectancy. Beneficiaries who are less than 10 years younger than the benefactor can also calculate their withdrawals throughout their expected life span.
Beneficiaries must make annual withdrawals on their inherited IRAs. If the original account holder had started taking RMDs while still alive, their beneficiaries have to take annual distributions while adhering to the 10-year rule.
Waived Penalties
Although the new inherited IRA rules take full effect in 2025, one provision the IRS has made is the waiver of penalties for missed distributions in 2024 on IRAs taken over in 2023.
Some account holders complained that the original language in the SECURE Act was too complicated to understand, so the SECURE 2.0 Act waived the excise tax for 10-year beneficiaries who didn’t take RMDs between 2021 and 2024. Beneficiaries must take their RMDs beginning in 2025.
Don’t Let the New Inherited IRA Rules Blindside You!
With retirement account regulations constantly shifting, these new inherited IRA rules could result in significant tax implications if not addressed properly. Navigating these changes on your own may leave you unprepared for what’s ahead. Speaking with a qualified financial advisor can help you understand your obligations and plan for these new regulations.
Don’t wait. For more information, call me at (317) 469-2455, email ssteel@deerfieldfa.com, or schedule a time through my online calendar. Curious about what others have experienced? Click here for client testimonials.
About Susie
Susie Steel is COO, Wealth Manager, and Senior Shareholder at Deerfield Financial Advisors, a fee-only financial advisory and wealth management firm with offices in Indianapolis and Chicago. With over three decades of experience in financial planning, Susie’s approach has always been rooted in a spirit of service, treating each client as an extension of her own family. She simplifies the complex for clients, with the goal of creating a calm, trusting, and nurturing environment. Her unwavering commitment to the principle of “To whom much is given, much will be required” serves as the driving force behind her dedication, diligence, and empathy.
Susie obtained a business management degree from Ball State University, holds the CERTIFIED FINANCIAL PLANNER® designation, and held the Accredited Estate Planner (AEP®) designation from the National Association of Estate Planners & Councils (NAEPC) from 2013 to 2018. Susie is actively involved with an extensive list of professional organizations, including NAPFA (The National Association of Personal Financial Advisors), a premier association of fee-only financial advisors, and has served on multiple boards, committees, and councils. Her consistent recognition as one of Indianapolis Monthly’s “Five Star Wealth Managers” for the past decade attests to her outstanding accomplishments (2009-2023).
Outside the professional realm, Susie has contributed to her community through numerous efforts including her involvement in the Financial Center First Credit Union (FCFCU), the Indianapolis Children’s Museum Planned Giving Council, the Kiwanis Club of Northwest Indianapolis, and Junior Achievement. She mentors women through the CFP® Board’s “WIN-to-WIN” program, embodies the spirit of Rotary Club of Carmel, advocates for Indiana Canine Assistant Network (ICAN), and actively serves on the board of the Mary Rigg Neighborhood Center (MRNC).
Susie and her husband, Kevin, reside in Carmel, Indiana, where they raised their three children. Outside the office, her focus centers around family, spirituality, and fostering meaningful connections. Embracing the concept of the body as a temple, her personal growth is nurtured through practices like strength training, yoga, and meditation. In her leisure time, she enjoys strolls with her dog, Lulu, and indulges in movies, podcasts, books, and the theater. To learn more about Susie, connect with her on LinkedIn.
