The following is an update to a previous discussion about RMDs (Required Minimum Distributions) subject to the 10-year rule for the Designated Beneficiaries of Inherited IRAs accessible here:
The IRS issued regulations on July 19, 2024, explaining the RMD rules for these beneficiaries. Although no RMD payments will be required in 2024, the 10-year rule still requires that IRA accounts be fully distributed within the 10-year time frame to avoid penalties. The beneficiaries must receive the entire amount by the end of the calendar year, including the 10th anniversary of the IRA owner’s death.
When the decedent IRA owner has not reached their beginning age for taking distributions of their RMDs, no RMDs will be required. Still, the inherited account must be fully distributed to the beneficiary within ten years.
When the decedent IRA owner has reached their beginning age for taking distributions of their RMDs, the beneficiary, in most circumstances, will be required to take RMDs under the beneficiary’s life expectancy as specified in IRS Publication 590B. However, the 10-year period for full distribution has not increased for accounts where the IRS waived the penalty for failure to take RMDs from 2021 to 2024.
Inherited Roth IRAs are not subject to RMDs, but the beneficiary must remove all funds within ten years to avoid penalties.
Under the 10-year rule, IRA beneficiaries should carefully evaluate the timing of the distributions from these accounts to minimize taxes and penalties according to their projected tax brackets and investment objectives. For example, the beneficiary of a Roth IRA might want to delay distributions for as long as possible to maximize tax-free returns. In contrast, the beneficiary of a traditional IRA might want to accelerate distributions to take advantage of lower tax rates.
For further reading, see the following: