New IRS Rules for Inherited IRA Distributions Explained

The IRS recently enacted new regulations that will alter how beneficiaries take required minimum distributions (RMDs) from inherited IRAs. Required minimum distributions are the sums that individuals must withdraw from retirement accounts once they reach the age of 73. Historically, changes began back in 2019 with the elimination of the stretch IRA, which affected how spousal and non-spousal beneficiaries managed their distributions. Joel Dixon, the Vanguard Global head of advice methodology, elaborated on these developments in a recent discussion. Non-spouse beneficiaries, in particular, will be required to accelerate their withdrawals, moving away from previous policies. While many see this as detrimental, there is potential upside: taking distributions sooner might prevent beneficiaries from falling into higher tax brackets later on. This could minimize overall tax liability and preserve more wealth over time. Ultimately, the key takeaway is that working with a financial advisor to navigate these rules can be crucial, as managing distributions can lead to a more favorable tax situation. A thoughtful approach could involve withdrawing more than the minimum required amount, enabling beneficiaries to even out withdrawals during the ten-year mandated distribution period. This strategy can alleviate the burden of high tax rates associated with large distributions and promote better management of taxable income over time.