Inherited an IRA? Here's What You Need to Know

Ever since the SECURE Act passed in 2020, there has been a certain amount of confusion over the effects it would have on taking distributions from an inherited IRA. The answer is finally here.

Here’s the backstory:

The SECURE Act effectively eliminated the Stretch IRA technique, which had allowed beneficiaries to stretch their required minimum distributions (RMDs) from an inherited retirement account over their life expectancy.  Instead, the new law said IRA beneficiaries of owners who died in 2020 or later would have to liquidate those accounts within 10 years of the death of the owner.  Surviving spouses, minor children of the IRA owner, disabled beneficiaries and others (referred to as Eligible Designated Beneficiaries, or EDBs) are exempt from these new rules, but most other beneficiaries will now require some additional planning.

The IRS had also proposed that many of those non-EDBs would also have to take RMDs from their inherited IRAs during the first nine years after the owner’s death, assuming the owner was subject to their own required minimum distributions before passing.  While the IRS chose to waive penalties for those who skipped these RMDs between 2021 and 2024, those waivers will end with 2024.  As a result, non-EDBs will be required to take RMDs beginning in 2025, in addition to following the new 10-year rule.

What this means for IRA beneficiaries:

While the last few years have allowed some beneficiaries to skip their RMDs and let their inherited IRAs continue to grow on a tax-deferred basis, the window to deplete the account may be significantly shortened. This is especially true for non-EDBs who inherited the account in 2020, as these beneficiaries will only have six more years after 2024 to spread out their account distributions and pay the resulting tax on that income. 

It's also worth noting that the required minimum distribution amounts are based on the beneficiary’s age and the Single Life Expectancy table published by the IRS. While this calculation is intended to spread the distributions over the beneficiary’s life expectancy, the account must still be depleted within ten years. As a result, a beneficiary may be able to take smaller distributions over the first nine years but be left with a significantly larger distribution in the tenth and final year. This increased income could potentially be taxed at a higher rate than necessary. 

These confirmed changes from the IRS require thoughtful planning with your Baird Financial Advisor, who can support you in finding the right combination of strategies that support your overall goals and wealth plan.  

Note: This article was originally published in November 2022 and was updated in August 2024.

The information offered is provided to you for informational purposes only. Robert W. Baird & Co. Incorporated is not a legal or tax services provider and you are strongly encouraged to seek the advice of the appropriate professional advisors before taking any action. The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.