Inherited Required Minimum Distributions (RMDs) are a crucial aspect of financial planning, especially for those who have inherited retirement accounts. The rules surrounding inherited RMDs have evolved over the years, and understanding these changes is essential for effective financial planning. In 2024, there are specific considerations and steps you should take to ensure compliance and optimize your financial strategy.
What Are Inherited RMDs?
Inherited RMDs are the minimum amounts that must be withdrawn annually from an inherited retirement account, such as an IRA or 401(k). These distributions are required by the IRS to ensure that the funds are eventually taxed. The rules for inherited RMDs differ depending on whether the beneficiary is a spouse, non-spouse, or an entity like a trust or estate.
Key Changes in 2024
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in 2019, brought significant changes to the rules governing inherited RMDs. One of the most notable changes is the elimination of the “stretch IRA” for most non-spouse beneficiaries. Instead, these beneficiaries must now withdraw the entire balance of the inherited account within ten years of the original account holder’s death. This rule continues to apply in 2024, with some additional clarifications and updates.
Key Considerations for Inherited RMDs in 2024
Beneficiary Type
Spouse Beneficiaries: Spouses have more flexibility with inherited RMDs. They can treat the inherited account as their own, roll it over into their own IRA, or take distributions based on their life expectancy.
Non-Spouse Beneficiaries: Non-spouse beneficiaries must adhere to the ten-year rule, meaning the entire account must be distributed within ten years of the original owner’s death. There are no annual RMDs required in 2024, but you must begin taking annual RMDs in 2025 if you haven’t already started. The account must be emptied 10 years following the original owner’s date of death.
Eligible Designated Beneficiaries (EDBs): Certain beneficiaries, such as minor children, disabled individuals, and those not more than ten years younger than the deceased, can still use the life expectancy method for RMDs.
Tax Implications
Distributions from inherited retirement accounts are generally subject to income tax. The amount withdrawn is added to your taxable income for the year, which could push you into a higher tax bracket.
Strategic planning is essential to manage the tax impact. Consider spreading distributions over several years to avoid a significant tax hit in any single year.
Investment Strategy:
Review the investment strategy of the inherited account. Depending on your financial goals and risk tolerance, you may need to adjust the asset allocation.
Consider the timing of distributions in relation to market conditions. Withdrawing funds during a market downturn could result in selling investments at a loss.
Estate Planning:
Inherited RMDs can impact your overall estate plan. Ensure that your estate planning documents, such as wills and trusts, are updated to reflect the inherited account.
Consult with an estate planning attorney to understand how inherited RMDs fit into your broader estate strategy.
Steps to Take for Effective Financial Planning
Identify the Type of Beneficiary
Determine whether you are a spouse, non-spouse, or eligible designated beneficiary. This will dictate the rules you need to follow for RMDs.
Calculate RMDs
If you are required to take RMDs, calculate the amount based on the IRS life expectancy tables. For non-spouse beneficiaries under the ten-year rule, plan the timing of distributions to manage tax implications.
Review Tax Strategies
Work with a tax advisor to develop a strategy for managing the tax impact of inherited RMDs. This may include spreading distributions over several years, utilizing tax-advantaged accounts, or charitable giving.
Adjust Investment Portfolio
Review the investment portfolio of the inherited account and make adjustments as needed. Consider your risk tolerance, time horizon, and financial goals.
Update Estate Planning Documents
Ensure that your estate planning documents are updated to reflect the inherited account. This includes updating beneficiary designations and reviewing the impact on your overall estate plan.
Consult with Financial Professionals
Inherited RMDs can be complex, and the rules are subject to change. Consult with financial advisors, tax professionals, and estate planning attorneys to ensure you are making informed decisions.
Conclusion
Inherited RMDs are an important consideration for anyone who has inherited a retirement account. The rules and regulations can be complex, but understanding the key considerations and taking proactive steps can help you manage the financial impact. By identifying your beneficiary type, calculating RMDs, reviewing tax strategies, adjusting your investment portfolio, updating estate planning documents, and consulting with financial professionals, you can navigate the complexities of inherited RMDs and optimize your financial planning for 2024 and beyond.
If you would like to discuss your personal situation, Contact Us.
Disclosure
The information provided in this blog post is for educational purposes only and does not constitute investment advice. Weaver Consulting Group is a Registered Investment Advisor. The opinions expressed herein are those of the author and do not necessarily reflect the views of Weaver Consulting Group or its affiliates. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The information is subject to change without notice and is not intended to be a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy. We are not tax professionals. Contact your tax professional for personal advice.
Readers should consult with their financial advisor to determine the best course of action for their individual situation. Past performance is not indicative of future results. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.