A Gift from the IRS or Tax Trap? Unwrapping New IRS Guidance for Inherited IRAs
The Internal Revenue Service (IRS) recently announced its decision to waive required minimum distributions for beneficiaries subject to the 10-year depletion rule in 2024 (You can find the full guidance here). This is the fourth, and likely final, year the IRS will permit eligible beneficiaries to forego required minimum distributions without facing punitive taxes. On the surface, this announcement was likely a pleasant surprise for certain IRA beneficiaries; however, it is important to note RMD deferral should not be a universal withdrawal strategy and the 10-year depletion deadline has remained unchanged.
While this notice provided a short-term relief in the form of current year income reduction, it did not change the 10th year depletion requirement. In essence, exercising the option to defer withdrawals for an additional year could lead to higher mandatory withdrawals and taxes in the future. Ed Slott (IRA Expert) stated it best, “paying taxes on RMDs is not an ‘if’ but a ‘when’. These taxes will have to be paid, so may as well get the funds out when the tax rates are the lowest, which for many is right now. Deferral in this case may be a short-sighted and expensive tax strategy.”
Who should NOT defer?
Inherited IRA beneficiaries who:
Believe their income will remain somewhat consistent during the 10-year distribution period
Believe their income will rise during the 10-year distribution period (wage inflation, promotion, applying for Social Security income, etc.)
Plan to move to a state bearing a higher state income tax burden
Who should potentially defer?
Inherited IRA beneficiaries who:
Anticipate a reduction in income at some point during the 10-year distribution period (retirement, change in employment, sabbatical, etc.)
Are considering implementing a Roth conversion strategy during the 10-year distribution period
Plan to move to a state with a lower income tax rate
Unfortunately, there is not a “one size fits all” strategy to ensure IRA beneficiaries minimize their tax burden during the 10-year depletion period. Your distribution strategy should be as unique as your fingerprint, tailored to your individual circumstances. Our experienced team will work with you to develop a customized distribution plan designed to help lower your tax exposure and provide support for both your short and long-term investment goals.
financial advisor Tennessee, financial planner Tennessee, wealth manager Tennessee, financial coach Tennessee, retirement planning Tennessee, fiduciary financial advisor Tennessee, wealth planner Tennessee, wealth planning Tennessee, wealth strategist Tennessee, wealth coordinator Tennessee, investment planner Tennessee, CFP Tennessee, financial expert in Tennessee, money manager in Tennessee, boutique wealth management in Tennessee, boutique money manager in Tennessee