Kelly Bullis: Did you inherit an IRA? Rules you must follow

We have gone several years waiting for our friends at the IRS to issue updated guidelines on how to treat inherited IRAs and Roth IRAs.

Due to the absence of clarity from the IRS, there arose a wild, wild west of how to deal with inherited IRAs, many ideas have been put forth as “law” which are now debunked by the latest IRS rules.

Before 2020, IRA owners could leave their accounts to their kids, grandkids, etc., and heirs could stretch RMDs over their lifetimes. In 2020, Congress changed the law to add a 10-year requirement. All IRA funds must be distributed within 10 years of the original IRA holder’s death.

There is an exception. (Isn’t there always?) If the beneficiary is a surviving spouse or minor children (until age 21), the chronically ill or disabled, and people who are not more than 10 years younger than the decedent. All of this group can stretch out the IRS Required Minimum Distributions (RMD) over their lifetimes. Also, anybody, not just the limited group above, who inherited an IRA before 2020, can also stretch out their RMD throughout their lifetime.

The confusion from Congress’ original writing had to do with whether a recipient subject to the 10-year rule had to take out payments evenly or could pick and choose when and how much to take out as long as the account was gone at the 10-year mark.

Now IRS says those folks are subject to a potentially confusing rule. If the decedent died before they were required to take any RMDs, then annual payments are not required. The beneficiaries can take any amounts they want as long as the account is closed at year 10. BUT, if the decedent died after their requirement to start taking RMDs, then the beneficiaries must take RMDs based upon their own life expectancy every year, with the remainder of the account in year 10. They don’t have the option to pick and choose which year and how much to take.

Of course, the IRS has been so kind in making an exception for the five years they left this issue undefined. If the IRA owner inherited the account in 2020, 2021, 2022, or 2023, the beneficiaries will not be penalized for not taking the RMDs properly. But in computing the 2025 RMD, they start with their life expectancy factor that applied to the beginning of the 10-year period and subtract one for each subsequent year. They start doing RMDs for the rest of the time, but still have to finish clearing out the IRA account by the original year 10.

Roth IRAs follow the same rules, except there are no RMD requirements, just closing the account at year 10. No big deal since Roth IRAs are not taxable.

Have you heard? Psalms 107:13 says, “Then they cried out to Yahweh in their trouble, And He saved them out of their distress.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.