IRA beneficiaries don't have to take an RMD this year. But here's why maybe they should.

MW IRA beneficiaries don't have to take an RMD this year. But here's why maybe they should.

By Alessandra Malito

The IRS has issued new guidance for beneficiaries who don't take an RMD this year

Beneficiaries of individual retirement accounts don't have to take required minimum distributions this year - a responsibility that can normally result in owing more in taxes.

The Internal Revenue Service recently issued guidance on the rules for RMDs from inherited IRAs, stating there would be no penalties if a beneficiary who is required to draw down those assets within 10 years doesn't take an RMD in 2024. Most nonspousal IRA beneficiaries must drain the assets of an inherited IRA within 10 years, and they may also be subject to RMDs depending on whether the original account owner died before or after they themselves were required to take distributions.

The IRS issued similar guidance in 2022 and 2023, but this opportunity likely won't last much longer.

"The IRS tipped its hand and basically told us that the long-awaited Final Regulations (that will, once and for all, tell us what the 'permanent' rules are) will be published very soon," Jeff Levine, a certified financial planner and chief planning officer at Buckingham Strategic Wealth in St. Louis, Mo., wrote on X (formerly known as Twitter). He noted that the IRS said it "anticipates" the new rules and penalties around RMDs will come into force on or after Jan. 1, 2025.

RMDs can be a nuisance for people who inherit an account while they are in their peak earning years, because they may have to pay more in taxes as a result of those distributions. This latest guidance from the IRS could be a welcome announcement - but it might also be worth ignoring, experts said.

"Beneficiaries can take advantage of the ability to defer taking RMDs, which will allow the money to continue to grow tax-free," said Mike Hunsberger, a certified financial planner and founder of Next Mission Financial Planning in Saint Charles, Mo. "This could be attractive, but it will also likely drive higher RMDs in the future, which could increase taxes. RMD planning requires a multiyear tax plan. Beneficiaries who expect the RMD to drive them into a higher tax bracket might benefit from taking some money out this year to more evenly spread out the income and, hopefully, reduce the tax impact."

Current and future tax rates should also play a part in the decision. Beneficiaries should keep in mind that tax rates could change in the next few years. The current brackets, set under the Tax Cuts and Jobs Act, are set to expire after 2025, at which point rates may go up, said Greg Giardino, a certified financial planner at Atlas Fiduciary Financial in Oakland, N.J. "With tax rates expected to rise in 2026 and for those beneficiaries who may retire in 2024, it could be a savvy move to get a discount now by actually taking an RMD on their inherited account," he said.

Deciding whether to take withdrawals or delay based on the latest guidance will come down to thinking ahead, said Lisa Kirchenbauer, a certified financial planner and president of Omega Wealth Management in Arlington, Va. Someone who may be retiring soon could stand to wait to take a distribution, since they'll be in a lower tax bracket when they do take the withdrawal. A retiree who is already claiming Social Security benefits and is or will be subject to their own RMDs might want to start drawing down an inherited account so that those distributions go down slowly over the 10-year period.

"On the other side, if an individual will be working or has high taxable income for the next decade, they may need to take smaller withdrawals each year to limit their tax burden," said Kevin McLoughlin, a certified financial planner and co-founder of Trio Wealth Management in Great Falls, Va. "Those individuals do not want to get caught in a 'tax bomb' on the 10th anniversary when the account needs to be fully withdrawn."

-Alessandra Malito

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April 18, 2024 15:37 ET (19:37 GMT)

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