March 22, 2023

---

In the last few years, there has been a lot of discussion about beneficiaries who have inherited an IRA, and the corresponding distribution requirements. In my 25+ years of being a CPA and financial advisor, I have rarely seen a provision that has brought on so much confusion primarily due to tax law changes. Below are some considerations for how a beneficiary should handle this situation.

#1 When did you inherit the IRA?

• Before the decedent’s required beginning date (age 72) and after 2019. In this scenario, you inherited an IRA before the decedent had started taking their own required minimum distributions (RMD’s). Then you must withdraw the entire balance of the IRA by December 31^st of the 10^th year following the year of death of the original IRA owner.
• After the decedent’s required beginning date (age 72) and after 2019. In this scenario, you inherited an IRA after the decedent had already started taking their own RMD’s. Then you have to at least take annual RMD’s over your own life expectancy during the 10-year period, but still have to empty the IRA 10 years after the original IRA owner’s death.

The good news is that if you were required to but didn’t take an RMD in 2021 or 2022 from an inherited IRA, the penalty will be waived, and you won’t have to start taking RMD’s until 2023.

#2 Are there any exceptions to this rule?

Some beneficiaries are exempted from the 10-year rule.

• A surviving spouse
• A disabled or chronically ill person
• A child who has not reached the age of majority
• A person not more than 10 years younger than the IRA account owner
• The IRA was inherited prior to 2020

These beneficiaries are not obligated to deplete the IRA within 10 years and will likely take annual RMD’s based on their life expectancy.

Beneficiaries have until Dec. 31^st  of the year following the original IRA owner’s death to begin withdrawals. However, if the original IRA account owner was required to take an RMD in the year they died but hadn’t yet, the beneficiary is required to take that RMD in  the year the original IRA account owner died, in the amount that the deceased would’ve withdrawn.

Additionally, a surviving spouse beneficiary may roll the traditional inherited IRA into their own IRA and then they will not have to take RMD’s until their own required beginning date.

#3 How to decide the timing of withdrawals?

In general, you want to take withdrawals from traditional inherited IRA’s in such a way to minimize the tax effect. Assuming you don’t need the money immediately, then it is best to spread out the distributions over multiple tax years. 

• You are nearing retirement. For example, if you plan to retire in 5 years, then you may want to wait until years 6 -10 to start drawing down the IRA. Again, if you inherit the IRA from someone who had already started taking their own RMD’s, then you still have to take a minimum amount each year but can still delay the majority of the distributions until after you retire when your marginal tax rate is lower.  
• You’re in your working years and don’t plan on retiring for over 10 years. In this case, you can just spread the distributions out evenly over  10 years. The exception would be if you expect to be in a higher tax bracket later, then you can take more out in the earlier years.
• You are retired. In this case, it is probably best to spread the distributions out evenly, but if you have some time before you must take RMD’s from your own IRA, you may want to frontload distributions.

In conclusion, once you determine the withdraw rules for your situation, how you draw down your accounts is very situation specific.  It’s best to consult with your CPA and financial advisor to determine how and when to implement an optimal withdrawal strategy.  

---

Important Disclosures:

Securities offered through IFP Securities, LLC, dba Independent Financial Partners (IFP), member FINRA/SIPC. Investment advice offered through IFP Advisors, LLC, dba Independent Financial Partners (IFP), a Registered Investment Advisor. IFP and Finspire, LLC are not affiliated.

The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Independent Financial Partners and Finspire do not provide legal or tax advice. Any potential tax advantages or benefits will depend on your circumstances. Consult your tax professional about your individual tax situation and visit IRS.gov to learn more. Past performance is not necessarily a guide to future results.