IRA Distribution Update for 2024

The Internal Revenue Service just announced an important rule for the 2024 tax year that impacts anyone with an inherited IRA.

Beginning in 2020, the rules for how fast you must empty an inherited IRA account changed for most beneficiaries. Up until then, the person inheriting the money was only required to make required minimum distributions based on their life expectancy, or in some cases, the life expectancy of the deceased.

For most people, other than a surviving spouse, the rule is now that you must withdraw all funds within 10 years. (There are some instances where the withdrawal must be within five years—details below—but 10 years is the norm.)

What hasn’t been clear since this new rule went into effect is whether you must take an annual required minimum distribution each year, regardless of whether you intend to keep the account open up until the 10-year deadline.

In the past three calendar years, the IRS has waived any need for an annual RMD during the 10-year period. And the IRS just announced it has waived that rule again for the 2024 tax year. That means if you don’t want to take an RMD from an inherited IRA this year, you don’t have to. But you still must be planning for when you will empty the account before the 10-year anniversary. And there are some important rules to understand.

Here's what I want anyone who has inherited an IRA to understand.

Certain beneficiaries may have more than 10 years.

If you inherited an IRA from someone who died before January 1, 2020, you can still use the old rules which allowed RMDs based on the age of the beneficiary.

Additionally, the new 10-year rule has a few key exceptions: Surviving spouses, children of the deceased who are minors, a disabled or chronically ill person, and anyone who is no more than 10 years younger than the deceased are not held to the 10-year rule. They may choose to base their RMD on their own life expectancy. (Note: when children are no longer minors, they must abide by the 10-year rule.)

You can make withdrawals at any time within the 10 years.

I want to be clear, that there is no rule that says you must wait until year 10 to empty the account, or you must take out equal percentages each year. The only requirement is that you must have withdrawn all the money by the end of the 10^th year, following the year the person died. (Yep, you read that right, you actually have 11 years from the year of death.) If you want to withdraw all the money immediately, you can. Or you can make periodic withdrawals at any time within the 10-year window. Or you can wait and withdraw it all at the last minute. It’s your choice. But keep reading, because how you time your withdrawals can make a big difference in your total tax bill.

Withdrawals from traditional IRAs will be taxed as ordinary income.

The reason the withdrawal rules for inherited IRAs changed starting in 2020 is that the government decided it wanted to speed up when it can collect tax on traditional IRA accounts. (Please note, the same 10-year rule applies to an inherited Roth IRA account. You must empty the account. You won’t owe tax on that money, but once you make the withdrawal, that money is now regular taxable money, no longer sheltered in a tax-advantaged Roth account.)

Given that every penny withdrawn from an inherited traditional IRA is counted as taxable income you need to be strategic in how you will time your withdrawals.

Waiting to make a large withdrawal can trigger a big tax bill.

Any time you make a withdrawal from a traditional inherited IRA, the amount of the distribution will be treated as taxable income for that tax year. For example, let’s say you have $70,000 in wages for the year, and also make a $30,000 withdrawal from a traditional IRA. That means your income for the year will be $100,000, not $70,000.

That makes it important to have a withdrawal strategy that doesn’t cause extra tax headaches. You want to avoid a big distribution that could bump your income so high it moves you into a higher tax bracket for that tax year.

And those of you who are heading into your mid-60s, or are already there, need to be especially careful. The monthly premium you pay for Medicare Part B is based on your income. And what you need to know is that the premium you pay is based on your income reported on your tax return from two years ago. For example, if you enroll in Medicare at age 65, your first year Part B premium will be based on the income reported on your tax return from when you were 63. So no later than age 63 you want to avoid any big spikes in your income that could mean a higher Medicare Part B premium once you are enrolled.

If an estate inherited the IRA, you could be held to a 5-year distribution rule. 

If the deceased wasn’t yet taking his or her own required minimum distributions and the estate (not an individual) was listed as the direct beneficiary of the IRA, the account must be emptied within five years.