Understanding the Latest Rules on IRA and Inherited IRA RMDs

by - Mark Ward,

artist - Daisy Lopez

Understanding the Latest Rules on IRA and Inherited IRA Required Minimum Distributions

In today’s financial landscape, navigating the rules surrounding Individual Retirement Accounts (IRAs) and inherited IRAs can be daunting. With regulations evolving, especially concerning Required Minimum Distributions (RMDs), it’s essential to stay informed to make the best decisions for your retirement planning. In this newsletter, we’ll break down the current rules on RMDs for both traditional IRAs and inherited IRAs, citing the latest information from the IRS.

Traditional IRA Required Minimum Distributions (RMDs)

1. Age to Start RMDs: As per the IRS regulations, individuals must now begin taking RMDs from their traditional IRAs starting at age 73. This change follows the SECURE Act 2.0, which adjusted the starting age from 72.

2. Calculation of RMDs: The amount of the RMD is calculated based on the account balance as of December 31 of the previous year and your life expectancy factor, which is provided in the IRS Uniform Lifetime Table. For 2024, the IRS continues to use the table published in 2023, though there have been discussions about potential updates based on on changes in life expectancy.

3. Annual Requirement: You must take RMDs each year, and the failure to do so results in a hefty penalty. The penalty for not taking the required distribution is 25% of the amount that should have been withdrawn, which can be reduced to 10% if corrected within two years.

4. RMD for Multiple Accounts: If you have multiple traditional IRAs, you may aggregate the balances of all your accounts to calculate the total RMD for the year, and only take it out of one or more accounts. However, if you are also doing a Roth Conversion that same tax-year, the RMD for all accounts must be taken in its entirety BEFORE you execute the conversion to avoid penalties.

5. Charitable Contributions: If you're over age 70½, you may use a Qualified Charitable Distribution (QCD) to satisfy your RMD. This allows you to donate up to $105,000 in 2024 directly to a charity from your IRA without having to include the distribution in your taxable income.

Inherited IRA Required Minimum Distributions (RMDs)

1. New Rules from the SECURE Act: The SECURE Act, effective January 1, 2020, significantly changed the rules for inherited IRAs. Previously, beneficiaries could “stretch” distributions over their lifetimes. The new rules mandate that most non-spouse beneficiaries must withdraw the entire balance of the inherited IRA within 10 years of the original account holder’s death. This is known as the “10-Year Rule.”

2. Exceptions to the 10-Year Rule: Certain beneficiaries are exempt from the 10-Year Rule. These include:

  • Spouse Beneficiaries: Spouses can treat the inherited IRA as their own, thereby following the same RMD rules as account holders.

  • Minor Children of the Decedent: Minor children may take distributions based on their life expectancy, but this option ends when they reach the age of majority or are no longer a dependent at which point they must convert to the 10-year rule.

  • Disabled or Chronically Ill Beneficiaries: Individuals who are disabled or chronically ill may also stretch distributions over their lifetimes.

  • Beneficiaries not more than 10 years younger than the decedent: This includes certain individuals such as siblings.  These beneficiaries may use their own life expectancy to calculate their RMD.

3. RMDs for Beneficiaries of Roth IRAs: The rules are slightly different for inherited Roth IRAs. Beneficiaries are not required to take annual RMDs during their lifetime, but the 10-Year Rule applies, so all assets must be withdrawn by the 10th year after the original owner’s death.

4. Inherited IRA of a Deceased IRA Owner: If you inherited an IRA from someone who had already started taking RMDs, you will need to take distributions based on the life expectancy of the original owner for the year of their death for years 1-9 and then a full distribution by the end of year 10.

5. Penalties for Non-Compliance: Just like with traditional IRAs, failing to take the required distributions from an inherited IRA can result in a penalty. The IRS imposes a penalty of 25% of the amount that should have been withdrawn, which can be reduced to 10% if corrected within two years.

Practical Considerations

1. Planning Ahead: It’s crucial to plan your withdrawals strategically to optimize tax implications. For traditional IRAs, this involves calculating your RMD accurately and considering the impact on your taxable income.

2. Tax Implications: RMDs are generally considered taxable income, so it’s important to consider how these distributions will affect your overall tax situation. Inherited IRA distributions also have tax implications, and planning can help mitigate unexpected tax liabilities.

3. Consult a Professional: Given the complexities involved, it’s wise to consult with a qualified financial advisor or tax professional to ensure compliance with the IRS rules and to optimize your retirement, tax, and inheritance planning strategies.

Conclusion

Navigating the rules for IRA and inherited IRA RMDs can be challenging, but staying informed and planning accordingly can help you manage your retirement savings effectively. The IRS guidelines are designed to ensure that retirement accounts are used for their intended purpose—providing financial security during retirement—while also addressing estate and inheritance considerations.

For the most current information, always refer to the IRS website IRS.gov, which offers comprehensive resources and updates on retirement plan rules and regulations.

Thank you for reading, and as always, please reach out with any questions or for further clarification on these matters.  We are happy to help and happy to have a discussion regarding your unique situation.

Mark A. Ward

V.P., Operations & Chairman IPC

 

Lucien, Stirling & Gray Advisory GroupComment