The Internal Revenue Service (IRS) has announced final regulations regarding inherited Individual Retirement Accounts (IRAs), which will become effective on January 1, 2025. These updates will affect individuals who have received an IRA inheritance since 2020 or anticipate inheriting one in the future. With the passing of the Secure Act in December 2019, the method known as the stretch IRA, which permitted beneficiaries to take distributions based on their life expectancy, has been abolished.
Instead, a new rule specifies a 10-year limit for how long inherited assets can accumulate tax-deferred, unless particular exceptions apply. This rule is relevant for both traditional and Roth IRAs. Beneficiaries of Roth IRAs have a decade to make distributions, with the first nine years allowing for optional distributions.
Updated IRS Guidelines for Roth IRAs
Nevertheless, the account must be fully distributed by the close of the tenth year. For traditional IRAs, if the original account holder passed away on or after the mandatory beginning date for Required Minimum Distributions (RMDs), the “at least as rapidly” regulation comes into play.
This stipulates that if the original account holder or a primary beneficiary was already receiving annual RMDs, the subsequent beneficiary is also obligated to take annual RMDs during the 10-year timeframe. The IRS has specified that starting in 2025, heirs who inherit an account from someone who was already taking RMDs must adhere to this requirement. Not doing so will incur an excise tax penalty.
It is essential for anyone who inherits an IRA to grasp these new regulations to avoid costly penalties and to manage the inherited assets wisely. Seeking guidance from a financial advisor can aid in navigating these shifts and ensuring adherence to the revised standards.
