Required Minimum Distributions (RMDs) have always been an important part of retirement planning, but recent legislative changes have made them significantly more complex, particularly for inherited or beneficiary IRAs.
Under the SECURE Act, the rules governing inherited IRAs changed dramatically. Most non-spouse beneficiaries, including adult children, are now required to fully distribute an inherited IRA within ten years of the original owner’s death. This is commonly referred to as the “10-year rule.”
At first glance, this may sound simple. However, the actual application has created widespread confusion.
Initially, many interpreted the rule to mean that beneficiaries could wait until the end of the ten-year period and withdraw the entire balance at once. However, subsequent guidance from the Internal Revenue Service clarified that if the original IRA owner had already begun taking RMDs, beneficiaries may also be required to take annual distributions during years one through nine, in addition to fully depleting the account by year ten.
This distinction is critical and often overlooked.
To add to the confusion, for 2021 through 2024, the IRS waived penalties for missed RMDs in many beneficiary IRA situations due to ongoing uncertainty surrounding the rules. This temporary relief led many investors to believe that annual distributions were not required.
That relief is now ending.
The IRS has resumed enforcement and is increasingly focused on ensuring that RMD requirements are being met, particularly for inherited IRAs. Failure to take the correct distribution can result in substantial penalties, historically as high as 50 percent of the amount that should have been withdrawn, although recent changes have reduced that penalty in many cases.
The practical implication is clear. Beneficiary IRAs now require careful, year-by-year planning. Distributions can be large, especially when accounts have grown over time, and those withdrawals are generally taxed as ordinary income. This can push beneficiaries into higher tax brackets, impact Medicare premiums, and affect other areas of financial planning.
In many cases, the decision is no longer just about compliance. It is about strategy.
Should distributions be spread evenly over ten years, or timed to lower-income years? Should partial Roth conversions have been done earlier to reduce the future tax burden? How do these withdrawals interact with other income sources?
These are not simple questions, and the answers depend on each family’s specific financial situation.
What is clear is that inherited IRA rules are no longer a “set it and forget it” matter. They require active oversight, coordination with tax planning, and an understanding of evolving IRS guidance.
If you have inherited an IRA, or expect to, now is the time to review your distribution strategy carefully. The cost of getting it wrong can be significant, but with proper planning, these accounts can still be managed in a highly tax-efficient manner.
If you would like assistance reviewing your situation or ensuring your RMDs are being handled correctly, please feel free to give us a call.
“Any opinions are those of Victor Connor and not necessarily those of Raymond James. Information is from sources deemed reliable, but accuracy and completeness are not guaranteed. Early withdrawals from retirement accounts may be subject to taxes and penalties. Please consult an independent tax professional regarding your specific situation.”
