Will RMDs be Required on an Inherited IRA in 2025?

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KS and MO Attorney Kyle E Krull

Written by Kyle Krull

Attorney & Counsellor at Law Kyle Krull is president of the Law Offices of Kyle E. Krull, P.A., an Estate Planning Law Firm located in Overland Park, KS. Estate Planning Attorney Kyle Krull has provided continuing education instruction to attorneys, accountants, and financial professionals at local, state, and national programs.

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POSTED ON: May 23, 2024

The Internal Revenue Service (IRS) recently delayed its proposed 10-year rule for Inherited IRAs.

Inherited IRA required minimum distributions will go into effect in 2025.

Estate planning strategies have changed significantly over the years.

While culture and the economy certainly affect planning, tax and estate law are critical factors in the ever-changing estate planning landscape.

In recent years, the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act altered how inherited IRAs are taxed.

Because traditional IRAs allow for money to grow tax-free until withdrawals are made, the IRS requires owners to make withdrawals after they reach a certain age.

Those who inherit must also make required minimum distributions (RMDs) if they are not spouses.

Generally speaking, the amount required to be withdrawn depends on the beneficiary's age.

The act created a rule where inherited retirement accounts must be emptied within ten years of the original owner's death.

According to a recent PlanSponsor article titled "Inherited IRA RMD Final Rules Postponed to 2025," the Internal Revenue Service (IRS) has recently delayed the proposed 10-year rule.

An Inherited IRA is subject to RMDs.

This year is expected to be the final year where the 10-year rule is not enforced for an inherited IRA.

What are Required Minimum Distributions?

As previously mentioned, the IRS wants money from these tax-deferred accounts.

As a result, IRA accounts where taxes are delayed until the withdrawal of funds have a schedule for when money must be taken from the account once the owner reaches a certain age.

The required minimum distribution is the smallest amount a person can withdraw yearly to avoid penalties.

While there is a required minimum amount, there is no maximum amount.

People can take as much out as they want.

They will just be taxed accordingly.

Non-spousal beneficiaries must also take required minimum distribution.

What Do I Need to Know about IRS Transition Relief?

The 2019 SECURE Act 10-year rule impacts the beneficiaries of estate owners who passed away before 2020.

Because the IRS has deferred the enforcement of this rule until 2025, heirs will receive some transition relief.

Originally, the relief was granted from 2020 to 2023.

This year is expected to be the final one for relief.

After the regulations for the 10-year rule have been approved, steep penalties will be triggered for those who do not comply.

What are these penalties?

The undistributed balance will be subject to a 25 percent excise tax or a 10 percent penalty if rectified within two years.


Strategic Estate Planning: Considerations for an Inherited IRA

With 10-year rule enforcement upcoming, estate owners and IRA beneficiaries must prioritize planning and preparations.

What steps should be taken?

Review beneficiary designations with the 10-year rule in mind.

Ensure these designations work with rather than against your current estate planning goals.

Mitigate the impact of tax liability for IRA distributions by exploring tax-efficient distribution strategies.

Work with an experienced estate planning attorney to optimize wealth preservation and reduce tax liability.

What are Key Inherited IRA Takeaways?

Inherited IRA beneficiaries are required to make minimum distributions.

The extended relief allows time to strategically mitigate the tax liabilities of inherited IRAs.

Working with an experienced estate planning attorney is essential for choosing beneficiaries and maximizing tax efficiency.

Take steps now to prevent avoidable taxes and penalties.

Fun stuff, yes?

This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.

Reference: PlanSponsor (April 18, 2024) "Inherited IRA RMD Final Rules Postponed to 2025"

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