Your Client Inherited an IRA. What Should They Do?
What You Need to Know
The IRS’ ever-evolving guidance on when RMDs must be taken from these accounts under the Secure Act has created confusion.
The tax liability can be substantial in some cases where the beneficiary is subject to the 10-year rule.
One option is to withdraw an equal amount for each of the 10 years to avoid a lump-sum distribution.
When a client inherits an IRA, they will have questions about when they should withdraw the money and what they should do with it. The IRS’ ever-evolving guidance on the requirement under the Setting Every Community Up for Retirement Enhancement (Secure) Act that most inherited IRAs be emptied in 10 years has led to confusion.
The IRS recently waived required minimum distributions in 2024 for beneficiaries of inherited IRAs who are subject to the 10-year rule. This is the fourth year in a row that the IRS has done this, retirement expert Ed Slott noted.
But, as Slott pointed out, just because beneficiaries don’t have to take a distribution this year doesn’t mean they shouldn’t.
Unless the inherited IRA is a Roth IRA, there could be significant tax implications, especially if the inherited IRA is sizable and if the client is a high earner. (Inherited Roth IRA assets must also be withdrawn within 10 years, but there are no taxes on the distributions as long as the money was in the account for at least five years.)
Clients with inherited IRAs will need advice on how to proceed with taking distributions. That advice will likely vary based on their situation.
Who Is Not Subject to the 10-Year Rule?
Beneficiaries who fall under the classification of eligible designated beneficiaries are not subject to the 10-year rule. Eligible designated beneficiaries generally include:
A surviving spouse
A disabled or chronically ill beneficiary
A child of the deceased account owner who has not reached the age of majority
A person who was not more than 10 years younger than the account owner
Should Your Client Take a 2024 Distribution?
These questions can help determine whether it makes sense to take an inherited IRA distribution even though RMDs are waived in 2024:
What is the client’s anticipated 2024 income and their tax liability?
How does their projected 2024 income compare to a normal income year?
Do they need the money?
For example, when adult children inherit an IRA, it is often common for them to be in their peak earning years. This may be especially true if the parents reached their normal life expectancy. In this situation, the tax hit can be significant if the IRA is of significant value.
One option is to take an equal amount in withdrawals from the account for each of the 10 years to help avoid a large lump-sum distribution, with a large tax hit, over a one- or two-year period. This can be a good option for clients whose income will be relatively stable over the decade.
