How the Latest IRA RMD Rule Changes Could Impact Your Retirement

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We finally have definitive rules from the IRS on how IRA beneficiaries must handle required minimum distributions (RMD).

As I have previously explained, the rules for IRAs that were inherited in 2020 or later, now require that beneficiaries other than a spouse must typically withdraw all that money within 10 years after the death of the IRA owner.? For beneficiaries of traditional IRAs, this means that tax must be paid as the money is withdrawn. (Even if you inherit a Roth account, the same 10-year rule applies, which means the money is no longer inside a tax-advantaged account.)

This was a big tax-law change as the old rules allowed the beneficiary to take RMDs based on their own life expectancy, rather than requiring the account be emptied within 10 years.

What hasn’t been clear since the law went into effect in 2020 is whether the new rule also requires the person who inherits the IRA to also make annual RMDs until they completely empty the account.

It’s now clear: Beginning in 2025 anyone who has inherited an IRA in 2020 or later (again, this doesn’t apply to surviving spouses) from someone who was already taking their RMDs from the account, must make annual RMDs from the inherited account during the 10 year period. To be clear, you can withdraw the entire amount immediately. But any year within the 10-year window where there is still money in the account, you must take an RMD withdrawal.

I want to be clear, this RMD requirement only applies if you inherited an account from someone who was already taking RMDs. If you inherit an IRA from an owner who wasn’t yet subject to RMDs, then you don’t have an annual RMD requirement, but you still must empty the account within the 10-year window.

Some good news for those of you subject to the new RMD rule: The IRS is not going to require retroactive RMD withdrawals for RMDs for the 2020, 2021, 2022, and 2023 tax years, for inherited IRA owners who inherited the account since the 2020 rule went into effect. And the IRS is also not insisting on RMD withdrawals for the 2024 tax year. The new annual RMD rule only kicks in beginning in 2025. But just remember: Your 10-year window is based on the year you inherited the account; so if you inherited an account in 2021 that is subject to the new rules, you only have until 2031 to empty the account (if you haven’t already).

Okay, now on to some tax strategy talk. If you have an inherited IRA based on these new rules, I want you to think carefully about how to minimize your tax bill. If you inherited a large traditional IRA, be careful waiting to take it all out in one big lump sum.

Withdrawals from traditional IRAs are taxed as ordinary income. If you wait until year 10 and have to withdraw all the money, there’s a good chance you could bump your taxable income into a higher tax rate for the year. Making smaller withdrawals over multiple years could be a better tax move. Or if you expect your income to be lower in a coming year, that might be a good time to take a large distribution from your inherited IRA. A trusted tax pro can help you run through scenarios.

And then there’s tax policy to keep in mind. Our current income tax rates are near historic lows. However, the 2017 tax legislation that put today’s rates in action is scheduled to expire after 2025. Congress must decide whether to extend the current rates beginning for the 2026 tax year or change them. And you and I know that depends on how things shake out in Washington. We could see rates stay the same, go higher, or go lower. There’s no way to know for sure right now. But if you were thinking you would wait a few more years to cash out your IRA, but are also concerned that rates might move higher beginning in 2026, then you might consider making withdrawals from your inherited IRA this year and next to reduce your balance in 2026. Or you can cash it all out before 2026. The key is to consult a tax pro to make sure you don’t push your tax bill into a higher tax bracket.

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