If you’ve inherited an Individual Retirement Account (IRA), there are important new rules under the latest version of the Setting Every Community Up for Retirement Enhancement Act, known as SECURE 2.0. Here’s a simple guide to help you navigate these changes and understand how they might impact your finances.
Key Changes to Inherited IRA Rules
1. The 10-Year Rule:
Under SECURE 2.0, most beneficiaries must withdraw all funds from an inherited IRA within 10 years of the original owner’s death. This is a change from the previous rules, where annual required minimum distributions (RMDs) were based on the beneficiary’s life expectancy.
2. Annual RMDs Waived Until 2025:
Since the new rule was announced in 2020, the IRS has waived the requirement for annual RMDs each year, including 2024. This means you can choose to withdraw the funds all at once or make periodic withdrawals, as long as the entire amount is withdrawn by the end of the 10th year.
How to Manage Withdrawals and Taxes
Tax Implications:
- If you’ve inherited a Roth IRA, taxes have already been paid, so withdrawals are generally tax-free.
- If you’ve inherited a traditional tax-deferred IRA, withdrawals will be taxed as ordinary income. For example, if you make $100,000 a year and withdraw $35,000 from an inherited traditional IRA, your taxable income would increase to $135,000.
Strategic Withdrawals:
To avoid bumping yourself into a higher tax bracket, consider spreading out your withdrawals over the 10-year period. This can help manage your tax bill and prevent large, unexpected tax hits.
Medicare Considerations:
- If you’re in your early to mid-60s, be mindful of how withdrawals can affect your Medicare Part B premiums. Medicare premiums are based on your income from two years prior, so a large withdrawal could increase your premiums.
Exceptions to the 10-Year Rule
1. Surviving Spouse:
A surviving spouse can take distributions based on their own life expectancy or roll over the account into their own IRA.
2. Minor Children:
Children of the deceased who are still minors can wait until they turn 21 before the 10-year rule kicks in.
3. Disabled or Chronically Ill Beneficiaries:
Beneficiaries who are disabled or chronically ill may also be exempt from the 10-year rule.
4. Estate Beneficiaries:
If the beneficiary is an estate and the deceased wasn’t taking RMDs, the account must be emptied within five years instead of 10.
Planning Your Withdrawal Strategy
Given the complexity of these rules and their potential impact on your taxes and Medicare premiums, it’s important to have a withdrawal strategy. Here are some steps to consider:
- Assess Your Current Income: Understand how withdrawals will affect your taxable income.
- Plan for Medicare: If you’re nearing Medicare age, consider the impact of withdrawals on your premiums.
- Spread Out Withdrawals: To manage your tax bracket, consider taking smaller withdrawals over the 10-year period.
- Consult a Professional: If you need help planning your strategy, reach out to a financial advisor.
Navigating the new SECURE 2.0 rules for inherited IRAs can be complex, but understanding these key points can help you make informed decisions. If you have any questions or need personalized advice, feel free to contact our office for assistance.
