On this episode of Tax Planning on the Whiteboard, your host and financial coach Jeff Montgomery discuss non-spouse inherited IRA’s and the 10-year rule, as there seems to be mass confusion on how Congress and the IRS are interpreting the complete withdrawal of IRA funds when a non-spouse inherits the account.

It started out relatively simple with the Secure Act in December 2019. But of course, when it comes to the government and the IRS, nothing is as simple as it seems.

The Secure Act 2.0 and specifically IRS PROPOSED regulation 10-105954-20, says in SOME circumstances, RMD’s are required in years 1 through 9 of the 10-year period. So, when does this apply?

Disclaimer: This is not specific information to anyone watching the video. Your circumstance is completely unique. Please consider this content as general information and education only. Please do not implement any strategies you see or hear in this video without talking to your financial or tax professional first!…(read more)

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Non-Spouse Inherited IRAs & the 10 Year Rule: Are RMD’s required?

Inheriting an Individual retirement account (IRA) can be a significant financial advantage, providing individuals with a nest egg for their retirement years. However, the rules surrounding non-spouse inherited IRAs can be quite complex and have recently undergone significant changes. One particular change that has captured the attention of many is the introduction of the 10 Year Rule and its implications for required minimum distributions (RMDs).

Previously, non-spouse beneficiaries of inherited IRAs were allowed to stretch out the distributions over their life expectancy, providing a potential lifetime of tax-deferred growth. However, with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019, this strategy was altered.

Under the new 10 Year Rule, non-spouse beneficiaries of inherited IRAs are required to withdraw the entire balance of the account within 10 years of the account owner’s death. This means that instead of taking distributions over a longer period, the beneficiary must distribute the funds within a shorter timeframe, potentially resulting in higher tax obligations.

The 10 Year Rule applies to non-spouse beneficiaries who inherited an IRA after January 1, 2020. However, certain exceptions exist for eligible designated beneficiaries such as minor children, disabled individuals, and chronically ill individuals. These eligible beneficiaries may still be able to take advantage of the stretch provision and take distributions over their life expectancy.

One of the common questions that arises from the 10 Year Rule is whether required minimum distributions (RMDs) are required within that 10-year period. The answer is no. RMDs are not mandatory for non-spouse inherited IRAs during the 10-year distribution period. However, it’s essential to keep in mind that while RMDs are not required, the entire balance of the inherited IRA must be distributed by the end of the 10-year period to avoid penalties.

The lack of annual RMD requirements during the 10-year period allows beneficiaries some flexibility in managing their tax liabilities. They can choose to take distributions at any time within those 10 years or wait until the end of the period. This flexibility can be advantageous, as it allows beneficiaries to coordinate distributions with their other income sources and potentially reduce their overall tax burden.

It’s crucial for non-spouse beneficiaries of inherited IRAs to fully understand the implications of the 10 Year Rule and how it impacts their distribution strategy. Partnering with a knowledgeable financial advisor or tax professional can provide invaluable guidance in navigating the complexities of inherited IRAs and developing a strategy that aligns with individual financial goals.

In conclusion, non-spouse inherited IRAs are subject to the 10 Year Rule, which requires beneficiaries to distribute the entire balance within 10 years of the account owner’s death. Despite not needing to take annual required minimum distributions (RMDs), beneficiaries must ensure they distribute the entire balance by the end of the 10-year period to avoid penalties. Seeking professional advice is crucial in developing a suitable distribution strategy and minimizing tax obligations during this time frame.