It is always a thoughtful gesture when a loved one leaves assets to you, but the details can be more complex. If it seems as though the IRS has repeatedly changed the rules around Required Minimum Distributions (RMDs) from IRA accounts, it is because they have. We finally have clarity around how these accounts and distributions are treated. There is a ton of conflicting information out there, so we thought it would be helpful to compile the rules and some tips and tricks for you.
- It used to be that one could stretch out their inherited IRA withdrawals over their lifetimes. For many beneficiaries, that is no longer the case.
- For most non-spouse beneficiaries, the inherited IRA will need to be drawn down within a 10 year window. You do not necessarily have to withdraw a portion each year for 10 years, but be careful to avoid a major tax hit if you take the entire lump sum at one time in year 10.
- If the person who died had begun taking RMDs, the inherited IRA is subject to annual RMDs and the 10 year window. If the person was not of RMD age, there is no requirement to withdraw funds each year but it must be fully drawn down by the end of the 10 year window.
- For IRA’s inherited by a spouse, there is more flexibility. The spouse can choose to treat the inherited IRA as his/her own and “stretch” the distributions over their life expectancy. This is helpful if the surviving spouse was younger and can therefore spread the RMDs over more years, lessening the tax burden and allowing for more tax-deferred growth.
- If you have a year where your income dips, it may be a good idea to take a larger withdrawal while you are in a lower tax bracket.
- If you have a large traditional IRA and would like to simplify or lower the tax burden to your eventual beneficiaries, we have a number of strategies that we can discuss.
If you have recently inherited an IRA, have a large traditional pre-tax IRA, or are unsure if you have been taking the proper RMDs from your existing Bene IRA, please contact Banyan Wealth.
JR McCormick, CFP®
Certified Financial Planner™
Director of Financial Planning
Wealth Advisor
Changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.