The 10-year rule , however , does not apply to spouses who inherit an IRA or 401 ( k ). RMDs do not apply to inherited Roth IRAs , experts add .
CBIZ Marks Paneth , an accounting firm in New York and a faculty member at Seton Hall University . “ We were hoping for better results , [ but ] now we know for sure that there aren ’ t penalties if [ clients ] didn ’ t take them through 2024 .”
The inheritors must start taking them next year , he says , but the amount due then won ’ t be extra high if the inheritors didn ’ t pay over the past three years while the IRS was deliberating . These clients are also excused from the 25 % penalty that ’ s usually imposed on skipped RMDs , Neumark says .
Unfortunately for some , those who have inherited IRAs since 2020 and were waiting for the final ruling don ’ t get a reset on their 10-year clock , according to Denise Appleby , an IRA consultant in Grayson , Ga . “ The account must be completely cashed out by year 10 ,” she says .
If the original owner died before taking RMDs , she explains , beneficiaries don ’ t have to take annual distributions . They can withdraw money anytime in the 10- year period if they want to , perhaps to reduce the tax burden in the 10th year , when the account must be completely emptied .
“ Receiving a large distribution in year 10 could be detrimental if that occurs in a year when having a lower adjusted gross income is desirable ,” says Ross Riskin , the Newtown , Conn . -based chief learning officer at the Investments & Wealth Institute . He cited years in which families are applying for financial aid for their children ’ s higher education , or hoping to qualify for tax credits that require certain income thresholds . “ Tax-bracket management can be critically important ,” Riskin says .
Advisors say it ’ s a good idea for clients to consider ways of reducing the RMDs . For instance , they can move money from a traditional IRA or 401 ( k ) to a Roth IRA , says Ed Slott , an IRA expert and founder of Ed Slott & Co ., a consulting firm in Rockville Centre , N . Y . The transfer will be a taxable event , he says , but Roths are not subject to RMDs . The funds then can grow and be withdrawn tax-free .
Still , Slott stresses , those who inherit IRAs cannot convert them to Roths . So it ’ s the original owners who should make the change before they pass on . “ It ’ s best if beneficiaries inherent a Roth ” rather than a traditional IRA or 401 ( k ), he says . An inherited Roth IRA can keep growing tax-free until the 10-year period is up . Even then , distributions from a Roth IRA are not taxed .
Advisors also suggest that clients could consider a qualified charitable distribution ( QCD ) if they are age 70½ or older . Up to $ 105,000 can be donated from an IRA in lieu of taking RMDs .
For most clients , though , experts recommend withdrawing roughly one-tenth of the inherited IRA every year , to even out the tax burden . “ It makes sense to levelize their distributions to some extent … so that they ’ re not left with a tax bomb in year 10 ,” says Heather Zack , director of highnet-worth solutions at Commonwealth Financial Network in Waltham , Mass .
The IRS ’ s final rule might not have been a surprise , Zack says , but it could “ change guidance ” for clients who were “ anticipating being in a lower tax bracket in the later years , perhaps because of retirement , who must now take those required distributions .”
SEPTEMBER 2024 | FINANCIAL ADVISOR MAGAZINE | 53