Breaking news! The IRS delays RMDs on inherited IRAs...again

Did you inherit an IRA after 2020 and are subject to the new distribution rules set by the Secure Act? The Secure Act did away with the stretch IRA, which allowed for non-spouse inherited IRA owners to "stretch" withdrawals out over the course of their lifetime.

Under the new rules, non-spouse owners of inherited IRAs must take an RMD each year and have the account at zero by year 10 after the date of death of the original IRA depositor.

But these new rules confused a lot of people! And the IRS has issued a "pass" each year on the RMD. Watch this video to understand what's coming in 2024 and beyond.

Transcript:

This just in, the IRS delays, RMDs on inherited IRAs, once again here in 2024. I'm Chris Kaminski, co-founder, and partner here with Consilio Wealth, where we specialize in working with tech professionals at Amazon, Microsoft, Meta, and Google.

Little bit of backstory here. The Secure Act, which went into place in 2020, changed the regulation of inherited IRAs and from that point moving forward, anybody that received an inherited IRA from somebody who died in 2020 or beyond was required to not only take a required minimum distribution each year, but also empty the account by the end of year 10.

This essentially killed the stretch IRA, which was the provision that allowed inherited IRA distributions to be stretched out over the recipient's lifetime. This caused a ton of confusion because people didn't know, am I just supposed to have the account go to zero at the end of year 10? So, then I don't have to take a required minimum distribution every year? Do I have to take a required minimum distribution every year and also empty the account by year 10? Nobody knew. So, the IRS started implementing additional guidance. At one point they said, you're not required to take an RMD every year and you just have to empty it by year 10 and then in another instance, they said, you are required to take an RMD every year and it has to be emptied by the end of year 10.

With all of this, they ended up each year since 2020 saying, you're not required to take the RMD because we've caused so much confusion. We'll just give you a pass. So, in 2020, this was waived. In 2021, this was waived. 2022, this was waived. 2023, this was waived. And the IRS just came out on April 17th of this year and said, guess what? It's waived again for 2024, but they said in 2025, required minimum distributions will start again and you must still have the account value at zero at the end of year 10 of the date of death of the original IRA depositor.

What's the strategy here? First and foremost, if you have an inherited IRA and you follow under these rules, i.e., the person who died that left you the IRA died in 2020 or later, you're not required to take an RMD here in 2024. Now, strategically, it might make sense to still take that RMD or take more than that RMD. It also might make sense to not take that RMD this year. I'll give you a couple of examples. We have clients that are still working that own these inherited IRAs. If they're still working, it probably makes sense to take the IRAs as gimme and not take the RMD this year because you would have to pay ordinary income on that requirement of distribution in the year that you received it, which is this year.

If you're not working anymore, it might make sense to take the RMD or take more than the RMD because ultimately, you're going to have to empty the account by year 10 anyways. In addition to that, if you're not working and you're not yet drawing on social security, it could make sense to take the RMD and spread out the income from these accounts so that you can have that account at zero before social security income starts. This could be sort of a tax strategy here. Note that also the 10-year period between whenever you inherited the account after 2020 and when you have to have that account at zero 10 years after you inherited it.

Contrasting that with when you're taking Social Security and when your own personal RMDs start on your IRAs, which is anywhere from age 73 to 75, depending on your year of birth, all of that stuff requires some analysis to figure out what's the right strategy to optimize for taxes. What you don't want to happen is to do nothing and delay, delay, delay, and then all of a sudden have Social Security kick in have your RMDs kick in on your own accounts, and then be required to take a huge lump sum out of this inherited account at the end of that year 10, because that'll create a huge tax bomb in that final year. In sum, the IRA says delayed the requirement to take a required distribution out of an inherited IRA that was received after 2020 for one more year plan on starting to take this in 2025 and they're moving forward and also plan on having that account at zero by the end of year 10. But 2024, there's no requirement to take an RMD. Hope this was helpful.