May 21, 2024
If you’ve inherited an individual retirement account (IRA), there are new rules in the latest version of the Setting Every Community Up for Retirement Enhancement Act, SECURE 2.0.
Previously, if you inherited an IRA account, the annual required minimum distribution (RMD) was typically based on your life expectancy. But in 2020, the rules changed.
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Notwithstanding a few exceptions, you must withdraw all funds as of 10 years after you inherited the IRA (and, in some cases, five years).
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“What hasn’t been clear since this new rule went into effect,” best-selling author Suze Orman wrote in a May 2024 edition of her weekly newsletter, “is whether you must take an annual required minimum distribution each year, regardless of whether you intend to keep the account open up until the 10-year deadline.”
In each year since the new rules were announced, including 2024, the IRS has waived the need for an annual RMD.
That means you can withdraw the funds from the account all at once or make periodic withdrawals, so long as you withdraw the entire amount by the end of the 10th year.
In that light, Orman writes, “how you time your withdrawals can make a big difference in your total tax bill.”
Here’s the personal finance guru’s explanation of the rules and her recommendation for how best to follow them.
How an inherited IRA could impact your tax bill
If you’ve inherited a Roth IRA, the taxes have already been paid upfront. But if you’ve inherited a traditional tax-deferred IRA, withdrawals will be taxed as ordinary income.
So if you make $65,000 a year, withdrawing $35,000 from an inherited traditional IRA would bump up your taxable income to $100,000.
“Given that every penny withdrawn from an inherited traditional IRA is counted as taxable income you need to be strategic in how you will time your withdrawals,” Orman writes.
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So, even though the IRS has waived the requirement for an annual RMD, Orman recommends spreading out your withdrawals lest you inadvertently bump yourself into a higher tax bracket for the year and trigger an extra-large tax bill.
If you’re in your early to mid-60s you should be particularly careful, Orman writes, since your monthly premium for Medicare Part B is based on your tax return from two years prior to enrolment.
In other words, while you’re eligible for Medicare at age 65, your premium will be based on your income from age 63, meaning a sudden massive bump in income for that tax year will be especially costly.
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Other considerations
There are a few exceptions to the 10-year rule — most notably, when the person inheriting the account is a surviving spouse.
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A surviving spouse can take distributions based on their own life expectancy, or roll over the account into their own IRA.
The same goes for children of the deceased who are still minors, but once they turn 21, they’re subject to the 10-year rule.
There are a few other exceptions, such as a beneficiary who is disabled or chronically ill.
And if the beneficiary is an estate, rather than an individual — and if the deceased wasn’t already taking the required RMD — then the account has to be emptied within five years, not 10.
Since withdrawals from an inherited IRA can impact your tax bill and even your Medicare Part B premium, it’s important to have a withdrawal strategy — and it could be worth talking to a financial advisor or tax expert to find out what will work best for you.
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Vawn Himmelsbach is a veteran journalist who covers tech, business, finance and travel. Her work has been featured in publications such as The Globe and Mail, Toronto Star, National Post, CBC News, Yahoo Finance, MSN, CAA Magazine, Travelweek, Explore Magazine and Consumer Reports.
