By Russell W. Hall, CFP®, CPWA®

First off, this update from the IRS only affects certain Inherited IRAs and Inherited Roth IRAs - those where the original account owner (referred to as the decedent) passed away in 2020 or later.  If you have that type of inherited account, keep reading!

As a refresher, the SECURE Act imposed a ten-year withdrawal window on most Inherited IRA accounts.  That means the account must be emptied within ten years of the year of inheritance.  For example, if the decedent passed away in 2021, the beneficiary would have until 12/31/2031 to withdraw the entire balance.  There are certain exceptions, including surviving spouses, minor children, and disabled inheritors.

In February of 2022, the IRS tried to “clarify” the rules (as only the IRS can!).  They added a minimum distribution requirement (RMD) during those ten years IF the decedent had already been taking RMDs.  If the decedent was not subject to RMDs, then that requirement was waived for the beneficiary and only the 10-year rule applied.

As we’ve stated in previous articles, this caused a tremendous amount of confusion; so much so that the IRS waived the penalties for not taking the annual distributions for tax years 2021, 2022, and 2023.  And the big news is that the IRS just waived the penalty again for 2024, essentially meaning that Inherited IRA owners can skip this year’s withdrawal.

That said, you might still want to withdraw from your inherited account this year.  The main issue we think about is that even if the IRS waives the penalty every year, the 10-year deadline is still looming.  For many inherited IRA accounts, putting off distributions until year 10 would result in a big tax hit that could actually be more onerous than taking withdrawals annually (and in effect smoothing out your tax rates along the way). 

If you’re not sure if this rule change applies to you, or if you have additional questions about your Inherited IRA, please visit our website to schedule a complimentary phone call or meeting with one of our fee-only financial advisors.