“No beneficiary has had to take a required minimum distribution under these 10-year rules yet,” says Ed Slott, a certified public accountant and nationally recognized authority on IRA distributions who writes about retirement finance for AARP.
Still, some financial advisers recommend that beneficiaries covered by the 10-year rule go ahead and take their RMD for 2024, even if it is effectively optional.
“My advice would be that you really want to start taking distributions,” says Brad Bernstein, managing director of UBS Private Wealth Management. “In 2025, the IRS may say you have to.”
On July 19, the IRS did just that, publishing final regulations on RMD changes pursuant to the SECURE Act and a 2022 follow-up law, SECURE 2.0. These include enforcing annual distributions under the 10-year rule, starting in 2025.
The IRS rule that mandates RMDs from inherited IRAs in the first nine years does not apply if the account is a Roth. However, Roth IRA beneficiaries subject to the 10-year rule must still withdraw all assets from the inherited account by Dec. 31 of the 10th year after the original account holder’s death.
Because Roth withdrawals are tax-free, it makes financial sense to let your Roth grow as long as possible and take a lump-sum distribution in year 10. “If you inherit a Roth, let it roll,” Bernstein says. “A Roth IRA is probably the best account to inherit.”
RMD game plan
Sooner or later, most nonspouse beneficiaries will have to map out a plan to draw down their IRA inheritance in a way that best helps them minimize taxes and achieve their financial goals. Here are some strategies to consider.
Spread withdrawals out. The 10-year rule that requires annual RMDs isn’t necessarily a bad thing, especially if the IRA you inherit has a sizable balance. Steady withdrawals over several years will help you avoid a late, large distribution that could push you into a higher tax bracket.
That’s one reason many advisers recommend that beneficiaries take distributions even when the IRS gives them a pass on the penalty.
“If you wait until the end of the 10-year period and you take out, say, $400,000, that’s going to dramatically affect your effective tax rate,” Ganglani says. The effect could be even more pronounced come 2026, when personal income tax rates are set to rise as provisions of the 2017 Tax Cuts and Jobs Act expire.
But don’t overdo it on those earlier distributions. Making moderate withdrawals across several years can spread out the tax hit and keep more of your assets invested and growing.
“Over time, that can help preserve IRA assets longer because you’re not withdrawing from them and they can benefit from the longer tax deferral,” says Rob Williams, managing director of financial planning, retirement income and wealth management at Charles Schwab.
Take other income into account. Withdrawals from traditional IRAs are taxable income. If you have variable earnings from other sources, such as consulting or gig work, and use the IRA to supplement that income as needed, it’s prudent to take bigger distributions in the years when the work earnings are lower. That reduces your odds of bumping up to a higher tax bracket.
Take potential tax changes into account. Slott recommends taking more sizable IRA distributions in 2024 and 2025 to benefit from lower tax rates ahead of the scheduled 2026 increase.
“Everyone loves the idea that the IRS says, ‘You don’t have to [take RMDs],’ but the tax bill is coming. Start taking money out now even if you don’t have to,” he says. “You want to look at smoothing out your tax bill over time.”
Options for spouses
As noted above, the IRS does not apply the 10-year withdrawal window to spouses. Someone who inherits an IRA from a deceased mate is still covered by the old rules: They can spread their withdrawals over their lifetime, which allows more of their IRA balance to remain invested and benefit from tax-free growth.
The starting date for mandatory withdrawals from inherited IRAs can vary, depending on the original account owner’s age at the time of death.
- If the deceased had reached the RMD starting age of 73, the surviving spouse must satisfy their late mate’s withdrawal requirement for the year of death, then start taking their own mandatory distributions the following year.
- If the deceased was not yet 73, the survivor must start taking distributions by Dec. 31 of the year following their spouse’s death or by Dec. 31 of the year their spouse would have turned 73, whichever is later.
A spouse beneficiary can avoid those complications by rolling the inherited IRA into one of their own, as long as it’s the same type of IRA — traditional to traditional or Roth to Roth. (Rollovers are not allowed for nonspouse beneficiaries.)
With a rollover, it doesn’t matter how old your late spouse was; the age that counts, for RMD purposes, is your own, and you won’t have to start taking them until April 1 of the year after the year you turn 73. You can also make contributions to the IRA — not permissible if the money stays in the original account — and continue building tax-free savings.
“That’s probably the best option for spouses,” Slott says.
Leaving the money in the inherited account might make sense if the spouse who inherits is younger than age 59½, Slott adds. That’s because the penalty the IRS typically imposes on IRA distributions before that age — 10 percent of the amount taken out — is not levied if the withdrawal is made by a surviving spouse tapping an inherited IRA. And you can always decide to go ahead with the rollover later.
The 10-year rule doesn’t apply to what the IRS calls “eligible designated beneficiaries,” or EDSs, who are “eligible for special treatment under the SECURE Act,” Williams says. This category includes beneficiaries who are minor children of the deceased IRA owner; have a disability or are chronically ill; or are less than 10 years younger than the original account holder.
How to invest an inherited IRA
Financial professionals recommend treating the inherited account balance as part of your overall asset mix. That means making sure that your overall holdings of stocks, bonds, cash and other assets are in line with your financial goals and risk tolerance.
“If you inherited an IRA, you’re fortunate,” Williams says. “Managing that wealth is clearly important. ... We suggest doing it in the context of a comprehensive financial plan.”
Say you inherit an IRA from an older relative who shifted the assets to 100 percent cash to eliminate risk. You’re still looking to maximize returns, so you might diversify the account into investments with greater growth potential, especially if you don’t need the money now.
If you are strapped for cash, you can use any annual distributions from the IRA to help fund everyday expenses. But if you don’t need the money, it might make sense to reinvest dollars you bring in from required withdrawals, Bernstein says.
Adam Shell is a freelance journalist whose career spans work as a financial market reporter at USA Today and Investor’s Business Daily and an associate editor and writer at Kiplinger’s Personal Finance magazine.