Losing a loved one is never easy, and sorting through a financial mess afterward only makes things harder. Thankfully, if you’re inheriting an IRA, things can be made a lot simpler by clearly understanding the rules of your situation.
That’s why we made this guide.
Whether you’re a spouse beneficiary, a family member, or another type of beneficiary, we’ll explain what 2024 RMD rules apply to your situation. From reducing taxes to avoiding penalties, this post will help you make informed decisions and make the most from your inheritance.
Table of Contents
- What Are Inherited IRAs and RMDs?
- Recent Key Changes to RMD Rules
- Inherited IRA RMD Rules for Spouse Beneficiaries
- Inherited IRA RMD Rules for Non-Spouse Beneficiaries
- Special Considerations for Eligible Designated Beneficiaries (EDBs)
- Inherited Roth IRAs and RMD Rules
- Trusts and Entities as Beneficiaries
- Avoiding Penalties and Managing Tax Implications
- Strategies for Managing Inherited IRA Distributions (Overview)
- Common Questions About Inherited IRA RMD Rules
- We Can Help You with Inherited IRA RMD Rules
What Are Inherited IRAs and RMDs?
When you inherit an individual retirement account (IRA), it becomes what’s called an inherited IRA. These accounts are treated differently from traditional or Roth IRAs you open yourself. They come with rules on how and when money must be withdrawn, often with tax implications attached.
This is where RMDs enter the equation…
At the center of inherited IRA rules are required minimum distributions (RMDs). These withdrawals are mandatory and prevent retirement funds from growing tax-free indefinitely. Whether you inherit a traditional or Roth IRA, you’ll need to follow distribution rules that apply to your situation.
What happens if you don’t?
Missing an RMD deadline is a big deal. If you fail to take out the required withdrawals, you could face substantial penalties on what you should have withdrawn. That said, with the right knowledge and strategies, you can manage these accounts efficiently and avoid such charges.
Recent Key Changes to RMD Rules
Recent updates, like those by the SECURE Act 2.0, have created new rules that impact beneficiaries of inherited IRAs. These changes reshape how you’ll manage inherited accounts in 2024 and beyond.
Let’s go over some of the most important changes:
RMD Starting Age Has Increased: The age at which required distributions must begin has been raised. If you were born in 1951 or later, RMDs now start at age 73. However, by 2033, this threshold will rise again to age 75. This adjustment allows more time for tax-deferred growth before mandatory withdrawals.1 It is also important to note that their distribution rules depend on whether the original owner was taking RMDs.
Clarity on the 10-Year Rule: Beneficiaries of accounts where the owner dies after reaching their RMD age must take annual RMDs during the first nine years. The remaining account balance must then be withdrawn by the end of the 10-year period. Previously, there was confusion about whether distributions could wait until the 10th year.2
Penalty Reduction: Before the SECURE Act 2.0, missed RMDs faced steep penalties of up to 50%. The new legislation reduced this to 25%, which is still significant, but it can drop further to 10% if the mistake is corrected within two years.3
Penalty Relief for Missed RMDs: From 2021 to 2024, penalties for missed RMDs have been waived, giving beneficiaries time to adjust to these new requirements. Starting in 2025, though, penalties for missed RMDs will resume.4
Inherited IRA RMD Rules for Spouse Beneficiaries
When a spouse inherits an IRA, they have more flexibility than any other type of beneficiary. As a spouse beneficiary, you can decide how to manage the account based on your financial needs. Options include rolling the account into your own IRA, keeping it as an inherited account, or withdrawing the funds entirely.
What happens if you roll over the money into your own account?
If you transfer the IRA into your own name, it becomes your account. This can be a smart move if you’re younger than the original account holder, as you can delay required minimum distributions (RMDs) until you reach age 73, or 75 for those who qualify starting in 2033. Additionally, this allows you to make contributions if you meet the qualifications, which can help the account grow over time.
What if you decide to keep it as an inherited account?
Another route is to maintain the IRA as an inherited account. This choice is often beneficial if you’re under 59½ and need access to funds because you won’t have to pay a 10% early withdrawal penalty. However, inherited IRAs have different RMD rules that may require distributions to begin earlier than they would for an owned IRA. This approach provides a balance between instant access to funds and the spreading out of taxable income.
Okay, now let’s say you just want to take everything out…
A lump-sum withdrawal is also an option. This provides immediate access to the entire balance, but it comes with significant tax implications. The full withdrawal amount will be added to your taxable income for that year, which may jump you into a higher tax bracket. While this method might suit those with immediate financial needs, it’s often the least tax-friendly choice.
Inherited IRA RMD Rules for Non-Spouse Beneficiaries
Non-spouse beneficiaries are required to follow stricter rules when they inherit an IRA. Unlike spouses, they cannot roll the inherited funds into their own retirement accounts. Instead, the account must be in the original owner’s name with the named beneficiary, and specific distribution rules apply.
What kind of distribution rules?
If the account holder dies before their required beginning date, non-spouse beneficiaries do not need to take annual RMDs. However, they must withdraw all funds by the end of the 10th year after the original account holder’s passing.
What if you’re inheriting an account that was already taking RMDs?
If the account holder passed after beginning their RMDs, the rules change. Remember, in this situation, beneficiaries are required to take annual RMDs for nine years, with the remaining balance withdrawn by the end of the 10th year.
Can you take distributions larger than the required minimums?
Taking larger distributions early is allowed but may increase your overall tax bill. For many, spreading the withdrawals over the entire 10 years is the better option, as it helps manage taxable income more effectively. Whether you withdraw funds steadily or wait until the year following the year of the account holder’s passing, understanding your options can make a significant difference in how much you keep after paying Uncle Sam.
Special Considerations for Eligible Designated Beneficiaries (EDBs)
Some individuals receive expanded options when inheriting an IRA. This group, referred to as eligible designated beneficiaries (EDBs), includes surviving spouses, minor children, those who are chronically ill, disabled individuals, and beneficiaries who are not more than 10 years younger than the original account owner.
Let’s look closer at the considerations affecting EDBs:
Minor Children: For minor children (biological or adopted), distributions are calculated based on their life expectancy until they reach age 21. After this milestone, the 10-year rule applies, which means the account’s funds will need to be completely depleted within 10 years. This approach allows families to delay larger withdrawals until later years, potentially easing the tax impact during the child’s younger years.
Disabled or Chronically Beneficiaries: Disabled or chronically ill individuals may use life expectancy to determine their required withdrawals. However, unlike minor children, these beneficiaries are not subject to the 10-year rule. However, these beneficiaries must meet IRS requirements to qualify for this option.
Non-Spouse Beneficiaries Within 10 Years of Age: Beneficiaries who are 10 years younger (or less) than the original account owner can also use their life expectancy for withdrawals. They are also not subject to the 10-year rule.
Please Note: When families include both EDBs and non-EDBs, inheritance planning can be more complex. Assigning accounts strategically—such as giving traditional IRAs to EDBs who qualify for lifetime distributions—can create better long-term outcomes.
Inherited Roth IRAs and RMD Rules
Inherited Roth IRAs bring a unique advantage to beneficiaries, primarily through their tax benefits. Unlike traditional accounts, withdrawals from a Roth IRA are tax-free as long as the account has been open for a minimum of five years. While these accounts do have withdrawal deadlines, they come with fewer restrictions compared to traditional IRAs.
What restrictions don’t apply to inherited Roth IRAs?
Beneficiaries aren’t required to take annual RMDs under the 10-year rule. Instead, they can withdraw any amount at any time, provided the account is completely emptied by the end of the 10th year.
Are there any other perks?
Another benefit of Roth IRAs is their tax-free growth. If withdrawals are delayed, the account’s investments can continue growing without taxes cutting into gains. This strategy is ideal for beneficiaries who don’t need immediate access to funds, maximizing the account’s long-term value.
What if you’re thinking about taking funds out sooner rather than later?
In some cases, taking early distributions can still be a smart move. If beneficiaries expect their income to rise in future years, withdrawing sooner can help avoid complications tied to income thresholds or financial aid qualifications. A well-timed plan can balance current needs and future benefits.
Trusts and Entities as Beneficiaries
When an IRA names a trust or entity as its beneficiary, the distribution rules for inherited accounts become more intricate than for individuals. Trusts can help manage how assets are distributed while aligning with long-term estate plans, but their tax treatment varies based on trust type.
Why does the type of trust matter?
The difference between see-through trusts and non-see-through trusts heavily influences how distributions work. For example, a see-through trust, like a conduit or accumulation trust, uses the age of its oldest beneficiary to determine RMDs. By contrast, non-see-through trusts, such as estates or charities, follow the five-year rule if the original account owner dies before their required beginning date.5
Did the SECURE Act impact trusts as well?
The SECURE Act brought significant changes for trusts as IRA beneficiaries. For instance, an applicable multi-beneficiary trust that includes an eligible designated beneficiary (EDB), such as a chronically ill or disabled individual, can stretch RMDs over that person’s life expectancy. This flexibility can be particularly helpful for families managing unique financial circumstances.6
Where else do the benefits of trusts come into play?
Trusts can also simplify situations where multiple beneficiaries are involved by dividing IRA assets into sub-trusts. Each sub-trust can then distribute funds according to the specific needs of the designated heir while adhering to tax guidelines tailored to their situation.
Please Note: Setting up a trust as an IRA beneficiary requires careful attention to detail. The trust must meet specific IRS requirements, such as being irrevocable and having clear documentation. Trustees also need to submit these details promptly to the IRA custodian to take advantage of any potential tax benefits.
Avoiding Penalties and Managing Tax Implications
Failing to take required minimum distributions (RMDs) from an inherited IRA can result in steep penalties. Remember, the penalty is now 25% under the SECURE Act 2.0. However, if the missed distribution is corrected within two years, this penalty can drop to 10%.
What do you need to do to avoid these penalties?
To sidestep these charges, accurate RMD calculations are a must. The amount required each year depends on the prior December 31st account balance and an IRS-provided life expectancy factor. A small error here can lead to big tax headaches, so double-checking numbers with your custodian or an advisor is a smart move.
Should you spread out the withdrawals?
Spreading withdrawals out over time can help beneficiaries keep their taxable income lower. For example, instead of taking a lump sum in the year following the year the account owner passes, beneficiaries can manage distributions strategically over several years. This approach is particularly helpful for avoiding higher tax brackets caused by large one-time withdrawals.
What if you’re bringing in other income?
Timing withdrawals alongside other income sources, such as wages or Social Security, can also reduce your overall tax bill. Beneficiaries juggling multiple income streams might want to work with a tax planning professional to organize a plan that minimizes liabilities while adhering to distribution rules.
Calculate Your Inherited IRA Distribution Rules
If you’re still feeling unsure about how inherited IRA distribution rules may affect you, there’s a way to quickly get a lot more clarity. Schwab’s Inherited IRA Distribution Rules Calculator helps you figure out what’s required based on your beneficiary type.
The calculator also explains how these rules change depending on whether the original account owner had started RMDs before their passing. This insight can be very important in planning your withdrawals strategically, especially if you’re balancing other sources of income or tax considerations.
Strategies for Managing Inherited IRA Distributions (Overview)
We’ve covered a lot of ground regarding the rules on inherited IRA withdrawals. You’ve seen how taking RMDs thoughtfully can make a big difference in how much of the account value is preserved and how taxes are managed. Let’s take a moment to review what we’ve gone over and dive into new strategies to make the most of your inheritance.
Here’s an overview of strategies for managing Inherited IRA distributions:
Spreading withdrawals over multiple years to reduce tax burdens: Distributing withdrawals across several years can prevent a large tax bill all at once. For those subject to the 10-year rule, smaller, regular distributions may help avoid jumping into a higher tax bracket while giving the account more time to grow.
Timing distributions during lower-income years to maximize tax efficiency: Taking distributions in years when your income is lower can help you pay less in taxes. This works especially well before required minimum distributions (RMDs) or Social Security benefits increase your taxable income.
Converting traditional IRAs to Roth IRAs to eliminate future RMDs: If you are a spouse beneficiary, you can convert an inherited traditional IRA to a Roth IRA. This can eliminate future RMD obligations and lock in tax-free growth. While this strategy requires upfront taxes, it can simplify management and reduce long-term tax implications.
Leveraging inherited IRAs as part of a broader retirement income strategy: Inherited IRA withdrawals can be used strategically to support retirement goals, whether for covering expenses, reinvesting, or balancing overall income sources.
Steps to take if the account holder has multiple beneficiaries: When more than one person inherits the same account, distribution rules can become more complex. Some beneficiaries may qualify as eligible designated beneficiaries (EDBs), while others fall under different requirements. It’s important to realize that when an IRA has multiple beneficiaries, separate accounts need to be set up by December 31st of the year after the account holder’s death. Failing to do so means distributions will be calculated based on the oldest beneficiary’s life expectancy.7
Calculate Your Inherited IRA RMD Amounts
If you’re curious, you can get a quick estimate of your Inherited IRA required minimum distributions (RMDs). Schwab’s Inherited IRA RMD Calculator calculates your annual withdrawal amount using factors like the prior year’s account balance and an IRS-provided life expectancy table.
With accurate numbers in hand, you can make better decisions about how and when to take distributions. This can help you manage your taxable income effectively, avoid penalties, and even maximize the account’s long-term value.
Common Questions About Inherited IRA RMD Rules
Understanding the ins and outs of inherited IRAs can be tricky. Below, we address some common questions to help clarify the rules and guide your decisions.
1. Can I delay RMDs for an inherited IRA?
The ability to postpone RMDs depends on the relationship you had with the account owner and the type of account inherited. If you’re a spouse beneficiary, you may treat the account as your own, often delaying RMDs until you reach your own required beginning date.
For non-spouse beneficiaries, the 10-year rule usually applies. This mandates that the account must be emptied within 10 years. If the account holder passed away after their required beginning date, annual withdrawals may also be necessary during the 10-year period.
2. What happens if I inherit multiple IRAs from the same account owner?
When inheriting more than one IRA, the rules may vary depending on the type of accounts. If the IRAs are of the same kind, you can often consolidate RMDs and take the total amount from one account instead of withdrawing from each. However, if the accounts differ—say, one is a traditional IRA, and another is a Roth—you’ll need to calculate and manage each account’s RMDs separately.
3. Can I disclaim an inherited IRA, and what happens if I do?
Disclaiming an inherited IRA is an option for those who do not wish to take ownership of the funds. When you disclaim, the account passes to the next designated beneficiary.
To qualify, the disclaimer must be made within nine months of the account holder’s death, and you must not have taken control or accessed the funds. Once you disclaim, the decision is irreversible, so consulting a professional before proceeding isn’t a bad idea.
We Can Help You with Inherited IRA RMD Rules
You don’t have to bear the burden of figuring out inherited IRA rules alone. Whether you’re determining your options as a spousal beneficiary or handling distributions under the 10-year rule, careful planning can help you avoid unnecessary stress and financial mistakes.
Working with a knowledgeable advisor can make the process much smoother. They can help you create a personalized plan, from choosing the best distribution strategy to reducing taxes along the way. With new regulations like those introduced by SECURE Act 2.0, staying on top of these changes is more important than ever.
Let us help you explore your options, understand the rules, and develop a plan that aligns with your goals. We invite you to schedule an introductory call with our team today.
Sources:
- https://www.nstp.org/article/secure-act-2-0-%E2%80%93-when-does-the-rmd-start
- https://www.kitces.com/blog/secure-act-2-0-irs-regulations-rmd-required-minimum-distributions-10-year-rule-eligible-designated-beneficiary-see-through-conduit-trust/?utm_source
- https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs#:~:text=If%20an%20account%20owner%20fails,was%20required%2C%20but%20not%20taken
- https://www.thestreet.com/retirement-daily/your-money/rmd-shockwave-2025-deadline-looms-for-ira-beneficiaries
- https://www.fidelity.com/retirement-ira/inherited-ira-rmd#:~:text=Inherited%20IRA%20withdrawing%20options&text=Transfer%20to%20an%20Inherited%20IRA,owner’s%20death%2C%20reduced%20by%201.
- https://www.fidelity.com/viewpoints/wealth-management/insights/iras-left-to-a-trust
- https://www.schwab.com/ira/inherited-and-custodial-ira/inherited-ira-withdrawal-rules#:~:text=If%20there%20are%20multiple%20beneficiaries,are%20taxed%20on%20each%20distribution
