New Inherited IRA Rules From the IRS: Clearing the Confusion
By Daniel Baumgartner & Petra Peters
Beneficiaries of inherited IRAs have had to contend with changing IRS regulations and guidelines brought about by the SECURE Acts of 2019 and 2022. This year, new inherited IRA rules came into effect that may significantly impact how beneficiaries receive distributions.
In this post, we outline the most important changes to inherited IRA rules to help you and your family adapt for a bright financial future.
How Inherited IRA Rules Have Changed
The most sweeping change in inherited IRA rules was effected by the passage of the SECURE 2.0 Act in 2022. The new rules changed how beneficiaries take required minimum distributions (RMDs) from inherited IRAs.
The original SECURE Act of 2019 required many non-spousal beneficiaries to take inherited IRA distributions within 10 years of the grantor’s death. This effectively eliminated the possibility of a stretch IRA, in which a beneficiary stretched tax deferrals over their lifetime. Certain non-spousal beneficiaries, like minor children and the chronically ill, were exempt from the new rule.
The 2019 inherited IRA rules confused many of those most affected by their passage. Some believed the new rule said beneficiaries merely had to deplete the funds by the end of the 10th year after the testator’s death and did not have to take gradual annual distributions.
The IRS only recently cleared up this confusion in July 2024. It confirmed that non-spousal beneficiaries must take annual RMDs on inherited IRAs. These new rules, outlined in the SECURE 2.0 Act, go into effect in 2025, so beneficiaries effectively have a grace period in the remaining months of 2024.
Beneficiaries do have some flexibility if the original IRA holder dies before the age they are required to begin taking RMDs, which is now 73. In that case, beneficiaries are not subject to the 10-year requirement and may continue to stretch out their RMDs. They have until April 1 of the year following the grantor’s death to begin taking RMDs.
Note: In 2033, the age at which required RMDs must be taken increases to 75.
How New Inherited IRA Rules Impact Roth Account Beneficiaries
The new 10-year rule does not apply to beneficiaries of inherited Roth IRAs. They are not required to make annual withdrawals like those with traditional plans do. Most distributions from Roth accounts are tax-free when made after retirement or death. However, the funds in inherited Roth IRAs still must be depleted by the 10th year after the grantor’s death.
This gives inheritors more time to try to grow Roth funds tax-free. It may be a good idea for Roth beneficiaries to leave the fund intact, skipping out on RMDs and seeking tax-advantaged growth through the fund’s investments.
Examples of the New Inherited IRA Rules in Action
Here are some fictional scenarios outlining how new inherited IRA rules can work in the real world.
Example 1
Melanie is 46. She inherited a traditional IRA from her father, who passed away at age 78. At the time of his death, he had already taken annual RMDs from the account. Now that Melanie holds the balance, she must take a required annual RMD from years 1 to 9 after her dad’s death. The account must be emptied out entirely by the end of year 10.
Example 2
Mike is 34 years old. His father invested in a traditional IRA but passed away at 62 before he was required to make RMDs. Mike inherits the IRA, but since his father died before he could start taking distributions, Mike is not required to take annual RMDs. He is still, however, required to deplete the entire account within 10 years of his father’s passing.
Terra Nova: Helping Families Navigate IRS Regulations
The Terra Nova Asset Management team assists families in decoding changing IRS guidelines and keeping in compliance with new inherited IRA rules, and we can help you too.
Does it seem like we may be a good fit? Reach out to us directly at 212-355-1234 or ppeters@terranovausa.com for the New York office (Petra) or 855-248-6630 or baumgartner@terranovausa.com for the New Jersey office (Daniel). You may also contact us here to schedule a meeting and we’ll get in touch with you soon!
About Daniel
Daniel Baumgartner is a founding partner of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Daniel has extensive experience in marketing, development of special U.S.-investment products, as well as customer acquisition and relationship management. His ultimate goal is to make a difference in his clients’ financial lives through honest investment advice. He strives to provide high-touch, personalized service and enjoys getting to know a client’s personality as it relates to their financial circumstances before crafting the right solutions. As money is a very personal subject, Daniel takes his responsibility as an advisor very seriously, forming long-term relationships with clients based on trust.
Daniel received his degree in finance and international business from New York University. Outside of the office, he is a hobby landscape, street photographer, and has a great interest in U.S. and European history (16th-19th centuries), believing it helps him answer the question “Why is something the way it is?”
About Petra
Petra Peters is a founding partner and the Chief Executive Officer of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Petra has decades of experience in the banking industry, asset management, overseeing the administration of individual accounts, and designing and advising specialized funds tailored to the requirements of international private and institutional clients. With extensive knowledge of both Europe and the U.S., she’s able to provide advice and services beyond the typical investment advisor. Petra desires for her clients to live a financially care-free life so they can pursue their passions, and she values their trust and gratitude. Creating invaluable friendships formed over years of partnership, some clients even consider her part of their family.
Petra’s interests outside of work include classical music, history, travel, charities, motorcycling, and golf. She is also on the board of a German charity.