How to Build Wealth with Strategic Planning for Inherited IRA Required Minimum Distributions (RMDs)
Navigating the rules around inherited IRA Required Minimum Distributions (RMDs) can be complex, especially after the Secure Act of 2022 (also known as Secure 2.0) brought significant changes. Understanding these rules is crucial for non-spouse beneficiaries to avoid unnecessary taxes and penalties. We use the terms Beneficiary (or Bene) IRA and Inherited IRA synonymously.
Key Considerations for Non-Spouse Beneficiaries
The RMD rules differ based on whether the original IRA owner had started their required distributions (now at age 73). If they had, the beneficiary must continue taking RMDs annually and fully deplete the account within 10 years. These rules also apply to inherited 401(k) and 403(b) accounts.
Common Questions Regarding Bene IRAs
When must RMDs start? .
How are RMDs calculated?
How does the 10-Year Rule work?
What are planning strategies to minmize taxes on RMDs?
Case Study: Strategic Planning for Tax Efficiency
Meet Nancy Askew, Nancy’s 58 and she inherited ½ of her mother, Alice’s IRA. Alice died on November 1, 2024 at age 85. Alice had taken her RMD before she died. If she hadn’t, her estate would need to take her RMD prior to YE 2024.
When must Nancy take her RMD? The rule is you must take your first RMD by 12/31 of the year following the owner’s death, so Nancy will need to take her first RMD prior to 12/31/2025.
How is Nancy’s RMD calculated?
The IRS directs the non-spouse beneficiaries use the single life expectancy table to calculate their RMD. As you can see in this chart, Nancy’s bene IRA account was valued at $600,000 at 12/31/2024. That value is divided by her life expectancy from the IRS table, which is 28.9 years. The result is her 2025 RMD amount of $20,761.
How does the 10-Year Rule work?
The 10-year rule has two important components - #1 the yearly minimum amount that one must take (this is the RMD) and #2 – the account must be totally distributed by the 10th year following the original owner’s death.
Our YouTube video below provides illustrations of Nancy's situation. The key thing to remember is with proper planning you can avoid an income tax landmine.
In Nancy’s case our plan projects to save her over $100,000 in taxes, while also enhancing her Social Security benefit.
Additional Considerations
The 10-Year Rule applies to Roth IRAs, but distributions remain tax-free.
Beneficiaries can always take more than the required RMD.
The 10% early withdrawal penalty does not apply to inherited IRA RMDs.
Certain exemptions exist for minor children, requiring specialized planning.
Planning & Working with a Trusted Advisor Can Maximize Your Wealth
Proper planning can turn an inherited IRA into a valuable financial tool rather than a tax burden. Working with an experienced Certified Financial Planner or CPA can help you optimize distributions and minimize taxes. If you’ve inherited an IRA, reach out to Ark Royal Wealth Management for expert guidance in managing your financial legacy.