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Understanding the "New-New" Inherited IRA Rules


The New Inherited IRA
The IRS has finalized updated Inherited IRA rules for 2024, set to apply to distributions beginning in January 2025.

Over the next two decades, approximately $84 trillion in assets will transfer from older generations to younger ones, and a significant portion of these assets will be held in retirement accounts like Inherited IRAs. With these transfers come new regulations for managing Inherited IRAs, especially following the SECURE Act of 2019 and the recent IRS updates.


The IRS has finalized new Inherited IRA rules in 2024, which will apply to distributions starting in January 2025. These rules can be complex, so don’t worry if you need further clarification. Below, we’ll break down the key points to help you understand how these changes could affect you or your heirs.


What Is an Inherited IRA?

An Inherited IRA is an account created by a beneficiary after receiving assets from the original owner’s IRA upon their death. For instance, if you inherit a traditional IRA, you’d set up an Inherited Traditional IRA. While Inherited IRAs continue to grow tax-free like standard IRAs, they come with specific rules. You cannot contribute additional funds to an Inherited IRA, but you are required to distribute its assets according to certain guidelines—or face significant penalties.


The 10-Year Rule for Non-Spouse Beneficiaries

A significant change under the SECURE Act is the 10-year rule for non-spouse beneficiaries, such as children, grandchildren, siblings, or friends. If you inherit an IRA from someone who passed away in 2020 or later, you generally have 10 years to withdraw the assets from the Inherited IRA.


  1. If the original owner had not started taking Required Minimum Distributions (RMDs): You have flexibility in how much you withdraw each year, as long as the entire balance is depleted by the 10th year.

  2. If the original owner had started taking RMDs: You are required to take annual RMDs for the first 9 years, with the full balance withdrawn by the end of the 10th year. The amount is calculated based on your age and the IRS Single Life Expectancy Table.


These new rules replace the "stretch IRA" rules, which previously allowed beneficiaries to extend withdrawals (and tax obligations) over their lifetime. However, if you inherited an IRA before 2020, the old "lifetime stretch" rules still apply.


Eligible Designated Beneficiaries (EDBs)

Certain beneficiaries, known as Eligible Designated Beneficiaries (EDBs), have more flexibility under the new rules. This group includes surviving spouses, minor children, individuals who are chronically ill or disabled, and those no more than 10 years younger than the original IRA owner.


If you qualify as an EDB, you may still stretch distributions over your lifetime. Alternatively, you can follow the 10-year rule or take annual RMDs if the original IRA owner was already receiving them.


Special Rules for Spousal Beneficiaries

As a surviving spouse inheriting an IRA, you have several options for managing the Inherited IRA:


  1. Roll it into your own IRA: This allows you to delay RMDs until age 73, giving you more time for the account to grow.

  2. Treat the inherited IRA as your own: This can be useful if you're already taking RMDs from your own IRA and want to consolidate accounts.

  3. Remain the beneficiary: If your spouse had already begun taking RMDs, you can continue the withdrawal schedule, which may be beneficial if you need immediate income.


Trusts as IRA Beneficiaries

When a trust is named as the beneficiary of an IRA, the new rules require close attention. Trusts can be structured as either conduit or accumulation trusts, each with distinct tax consequences. Inherited IRAs under a conduit trust distribute RMDs immediately to the beneficiaries, which could result in large tax liabilities. On the other hand, accumulation trusts retain the RMDs, but they are subject to higher tax rates on retained income.


Planning for the Future of Your Inherited IRA

With these new rules in place, it’s crucial to review your estate plan and understand how Inherited IRAs are impacted. Whether you're planning to leave an IRA to loved ones or you’ve inherited one yourself, the 10-year rule and other provisions may affect your withdrawal strategy and tax obligations.


At Ranch Capital, we’re here to help you navigate these changes and optimize your retirement planning. If you have any questions about managing an Inherited IRA or need assistance with your financial planning, don’t hesitate to reach out.


Financial Advisor

Ranch Capital

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