The IRS has again offered taxpayers relief from confusing rules for certain required minimum distributions (RMDs). Here’s what you need to know about the latest change involving inherited IRA RMDs.
IRS delays IRA withdrawal rules
Over the past few years, legislation has changed retirement plan rules.
- For example, due to the SECURE Act of 2019, most beneficiaries can no longer “stretch” distributions over their lifetimes.
- Instead, many non-spouse beneficiaries who inherited IRAs on or after Jan. 1, 2020, must empty the account within 10 years of the account owner’s death. (This “10-year payout rule” raised concern about annual RMDs for unsuspecting beneficiaries.)
- Later, the SECURE 2.0 Act (legislation that builds upon the first SECURE Act) increased the RMD age to 73 as of 2023. The RMD age will ultimately move to 75.
Those, and other, changes confused many, including certain account holders and inherited IRA beneficiaries, over when RMDs had to be taken. So, the IRS initially waived penalties for failing to take RMDs for certain IRAs inherited in 2020 and 2021. Later, the agency waived missed RMD penalties for IRAs inherited in 2022.
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Note: Previously, RMD penalties were 50% of the amount that should have been withdrawn. However, due to SECURE 2.0, the penalty for missing RMDs or failing to take the appropriate amount is 25% and can be as low as 10%.
Fast-forward. Earlier this year, the IRS announced another one-year delay of final rules governing inherited IRA RMDs — this time to 2025.
What does this latest rule delay mean? Some beneficiaries of inherited IRAs have more time to adapt to distribution requirements. The IRS will waive penalties for RMDs missed in 2024 from IRAs inherited in 2023, where the deceased owner was already subject to RMDs. (With the previous relief, penalties are waived for missed RMDs from specific IRAs inherited in 2020, 2021, 2022, and 2023.)
Inherited IRA rules 2024
Rules for inherited IRAs continue to be complex and already vary based on factors including account type, the original account owner (including their age and date of passing), and beneficiary (e.g., designated vs non-designated, age, non-spouse, etc.).
Update: Also, on July 18, the IRS released long-awaited final rules concerning inherited IRAs. Although these regulations were expected and won't begin until 2025, the agency cemented a key aspect involving RMDs that will impact many beneficiaries.
- Essentially, under the final IRS rules, for some, inheriting an IRA won't be as simple as waiting until the tenth year to withdraw all the funds in the account.
- For many heirs, the IRS now requires at least annual withdrawals throughout the 10 years
Even so, inherited IRAs can offer benefits such as tax-free earnings and growth. Additionally, if applicable IRS rules are followed, wealth transfer can be preserved from the original account owner to beneficiaries.
However, remember that RMD income and timing can have significant tax impacts. So, consult with a trusted tax professional or financial adviser to understand how this latest IRA RMD delay may or may not impact you.
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