The Internal Revenue Service (IRS) has announced that the Required Minimum Distributions (RMDs) on some Inherited IRAs will not be enforced in 2024, according to financial specialist Certified Financial Planner (CFP). This shift in policy marks the fourth consecutive year of RMD deferrals, a tactic aimed at assisting beneficiaries during harsh economic conditions.
While RMDs will still be calculated by the IRS, beneficiaries who choose not to withdraw these sums in 2024 will not be penalized. This leeway is an aid against potential market volatility, providing economic relief for beneficiaries whose financial security may otherwise be threatened.
However, only a subset of Inherited IRAs qualify for this exemption. Specifically, those accounts were obtained from original owners who passed away post-2019. This rule grants beneficiaries who fall under this category some flexibility in deciding whether to withdraw based on their fiscal necessities.
Every decision regarding these Inherited IRAs holds potential tax implications, signaling the importance of consulting a financial advisor when making decisions about RMDs. Furthermore, the Secure Act of 2020 altered the methods of distribution for these accounts. From enabling a “stretch” of distributions, it elected the 10-year rule, mandating the entire withdrawal of Inherited IRAs within a decade of the benefactor’s passing.
This new law has affected beneficiaries of these retirement accounts, changing the timeline of financial planning and wealth management.
Deferring inherited IRA distributions in 2024
The Act changed with the introduction of specified exemptions that pertain to spouses, minor children, disabled or chronically ill individuals, and beneficiaries less than ten years younger than the original account owner.
In spite of an IRS move in February 2022 to establish annual RMDs from the first to the ninth year of the 10-year rule, the IRS has chosen to put off these requirements for the fourth consecutive year. This leaves many stakeholders puzzled about this abrupt change and its potential consequences.
Interestingly enough, holders of Inherited Roth IRAs are exempt from Notice 2024-35, allowing them to enjoy tax-free growth and benefits of compound interest. These accounts also hold the capacity to select a lump sum withdrawal or periodic payouts. Still, inheritors must adhere to RMD stipulations after the nine-year mark or face penalties for non-compliance.
Given the tax implications and the nuanced laws that apply to these accounts, it is wise to seek advice from financial advisors and conduct thorough tax planning. The five-year rule is more evidence that planning in advance can be advantageous—as was allowing annual withdrawals from Roth IRAs into Roth 401(k) and Roth IRA accounts.
On the other hand, beneficiaries should be aware that taxes will accumulate on Inherited IRA balances. Delayed RMDs can result in a higher tax payable, which may need to be reviewed alongside personal financial situations and future earnings. In these circumstances, a professional financial planner or tax attorney’s advice could prove invaluable.
Fiscally and strategically sound decisions can steer beneficiaries toward favorable outcomes. Essentially, planning ahead and understanding these financial tools and their tax implications can maximize wealth and limit potential tax liabilities.
