The Final Rules on Inherited Traditional and Roth IRAs Explained

Anyone who’s ever tried to read the IRS rules on practically anything knows they’re usually clear as mud. And such is the case with the final ruling on how the IRS will treat Inherited Traditional IRAs and Inherited Roth IRAs. It’s taken a grand total of 5 years (since The Secure Act of 2019) for the agency to provide clarity for those of you who have been waiting and wondering if you’d be penalized for not taking annual Required Minimum Distributions (RMDs) on these particular accounts.??

With bated breath, we present the complex ruling recently set forth:??

Inherited Traditional IRAs???

If you are an “Eligible Designated Beneficiary” which is defined as a surviving spouse, a disabled individual, a chronically ill individual or a minor child and the Traditional IRA was inherited before January 1st, 2020, this account qualifies for the lifetime “stretch” provisions.??

If you are an Eligible Designated Beneficiary and the Traditional IRA was inherited after January 1st, 2020, this also qualifies for the lifetime “stretch provisions.”? Pretty straight-forward for these folks.??

Here’s where it gets a bit murky and where the real changes occurred in the passing of The Secure Act… if you are NOT an Eligible Designated Beneficiary the rules are as follows:??

• If the deceased account owner was RMD age at the date of death, the beneficiary is required to take RMDs every year and ensure the account is emptied by Year 10.??

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• If the deceased account owner was not RMD age at the date of death, the beneficiary is not required to take annual RMDs, however, the account still must be fully depleted by the 10th year following the original account owner’s death.??

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• In this instance, it would be wise to consult a tax professional who should be able to guide you on if taking RMDs or waiting to deplete the account is prudent.??

Inherited Roth IRAs??

Inherited Roth IRA rules are much simpler mostly due to the fact the distributions are not taxed since Roth contributions are made with after-tax dollars and grow tax-free. These accounts must be emptied by Year 10 following the death of the account owner but no RMDs are required in Years 1 – 9.??

Grace Period??

Given the IRS took a number of years to clarify these rules, those with Inherited IRAs who are required to take annual Required Minimum Distributions (RMDs) may bypass taking any in 2024 and start in 2025 without penalty.??

A Comment on Beneficiary Designations of your own IRAs?

It’s extremely important beneficiary designations are reviewed annually to ensure your wishes are stated appropriately. There are certain instances where a non-designated beneficiary (i.e. a non-individual such as a charity or an estate) could be either accidentally or purposefully named as the beneficiary. In these instances, the 5-year rule applies if the account owner dies prior to Required Minimum Distribution (RMD age). If the account owner dies after RMD age, then the Inherited IRA will follow the original IRA owner’s life expectancy.??

It's important to consult with your Financial Advisor as well as your tax professional if you’ve inherited an IRA. Not complying with the rules set forth could create unnecessary monetary penalties. These professionals should also be able to help guide you in making the best decision for your unique situation.??

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