Getting the right tax advice and tips is vital in the complex tax world we live in. The Kiplinger Tax Letter helps you stay right on the money with the latest news and forecasts, with insight from our highly experienced team (Get a free issue of The Kiplinger Tax Letter or subscribe). You can only get the full array of advice by subscribing to the Tax Letter, but we will regularly feature snippets from it online, and here is one of those samples…
IRS finally provides clarity on inherited IRAs, almost five years after Congress curbed stretch IRAs for many beneficiaries.
Before 2020, IRA owners could leave their accounts to their kids, grandkids, etc., and heirs could stretch RMDs over their lifetimes. Congress saw this as a loophole and curtailed it. Now, there’s a 10-year clean-out rule. This requirement applies to many IRAs inherited after 2019.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The 10-Year Rule for Inherited IRAs
Funds must be distributed within 10 years after death. So, if an IRA owner dies in October 2024, the beneficiary must clean out the IRA no later than December 31, 2034.
Eligible designated beneficiaries are exempt from the 10-year rule. This applies to surviving spouses or minor children (until age 21), the chronically ill or disabled, and people who are not more than 10 years younger than the decedent. They can still do stretch IRAs. Individuals who inherited IRAs before 2020 are also exempt. A surviving spouse also has the option to take the inherited IRA as his or her own.
IRS’s final regulations explain how the inherited IRA 10-year rule works. And, to the dismay of many, the IRS keeps a controversial distinction in place: Whether an IRA owner dies before, or after, his or her RMD beginning date.
- If the owner dies before their RMD beginning date, then beneficiaries needn’t take annual payouts. They can opt to wait until year 10 to take the money, get yearly distributions, or skip years, provided the IRA is fully depleted by the end of the 10-year period.
- If the owner dies on or after the RMD start date, annual payouts are required. Beneficiaries must take yearly RMDs over the 10-year period, beginning with the year after the original IRA owner died. This means RMDs must be paid to the beneficiary in years 1 through 9, with the rest of the account fully depleted by year 10. In this situation, the beneficiary figures annual RMDs based on his or her own life, so the younger the beneficiary, the smaller the yearly RMD amounts. Of course, the beneficiary can withdraw larger amounts from the IRA if he or she so chooses. There’s relief if the IRA owner died in 2020, 2021, 2022, or 2023.
Beneficiaries of IRAs in which the original owner was already subject to RMDs won’t be penalized for not taking payouts in 2021-24. They needn’t make up for the missed distributions. In figuring the 2025 RMD, they start with the life expectancy factor that applied to the beginning of the 10-year period and subtract one for each subsequent year. For example, if a beneficiary inherits an IRA in 2021, the 10-year clean-out rule applies, the decedent started taking RMDs before death and the beneficiary didn’t take RMDs in 2022, 2023, or 2024. Under the IRS’s final rules, the beneficiary needn’t make up for the three years of missed RMDs. He or she must take only seven years of RMDs, starting with the first payout in 2025, and clean out the account by the end of 2031.
The 10-Year Rule for Roth IRAs
Beneficiaries of Roth IRAs are also subject to the 10-year rule, with two key differences. They needn’t take annual RMDs over 10 years. Also, similar to Roth IRA owners, Roth beneficiaries aren’t taxed on distributions.
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.
Related stories
- SECURE 2.0 ACT Summary: Retirement Plan Rules to Know
- Five-Year Rule on Roth IRA Contributions
- IRS Delays IRA RMD Rules Again
-
With Fixed Indexed Annuities, Zero Is Your HeroFixed indexed annuities are retirement tools that can offer potential growth as well as principal protection by limiting market risk. Here's how they work.
-
Before Buying Your First Home, Get These Three Ducks in a RowWith mortgage rates higher than we're used to, making sure you can comfortably afford to buy your first home is more important than ever.
-
Changes to Estate Tax Are Coming... Six Options Congress Could TakeThe Tax Letter An important estate tax change is looming. Here are six ways that Congress might address estate taxes in 2025.
-
Should We Worry About the Slowing U.S. EconomyThe Letter With the labor market cooling off and financial markets turning jittery, just how healthy is the economy right now?
-
IRS Skirts TikTok Ban to Sniff Out Tax ScammersTax Scams Social media scams caused thousands to file inaccurate returns. What does that have to do with TikTok?
-
Who Does the IRS Audit the Most?Audits The IRS has a $400K audit directive problem. Here’s what you need to know.
-
IRS Hauls Back $1.3 Billion From High-Income EarnersTax Filing Certain income and wealth levels can trigger an IRS audit. Here's what you need to know.
-
Incorrect ERC? IRS Points to Five New Red FlagsTax Credits These signs could mean there’s an error in your Employee Retention Credit claim.
-
Aging in Place Will Be Big Business for Home BuildersThe Kiplinger Letter Many people will be looking to make their homes aging-friendly in the years to come.
-
IRS Has No Set Plan to Replace Old TechIRS What could old IRS technology mean for your federal tax return and cybersecurity?
