IRA distribution rules have changed several times over the past several years so we want to make sure that you are familiar with the current rules for new IRA distributions.

In 2024, NO distributions are required by the original IRA or retirement account owner PRIOR to age 73. The maximum age for waiting to take your first IRA distribution was lengthened from 70 ½ to 73. So, from the year in which you turn 73 through the year in which you die, you MUST take what is known as a Required Minimum Distribution (or RMD for short). You can take out more money, but the government requires that you take out at least the RMD amount annually. The amount of the RMD must be recalculated annually and the amount is determined by taking the year-end balance of the account on the last day of the prior year and dividing by the government’s life expectancy for you. To make it a little more challenging, there are several different life expectancy tables that could apply depending on who the beneficiaries of your IRA are.

When the account owner dies, if he or she was married and named his or her spouse as the beneficiary, there will be a tax-free spousal rollover of the account balance into either a new IRA account for the spouse or the amount can be rolled into the spouse’s pre-existing IRA account. If the deceased spouse was required to take an RMD in the year in which they died, and did not, the surviving spouse must distribute that amount by the end of the year. In subsequent years, no additional IRA distributions are required until the surviving spouse who inherited the IRA reaches age 73.  If the deceased spouse was younger than 73, no RMD is required by the inherited spouse in the year of death.

For inherited IRA’s, those inherited by someone other than the deceased’s spouse, the rules are a little bit different. In the year that a person dies, if they’ve already taken their required distribution for the year, no other distributions are required from any family members who might inherit the IRA. If the original IRA owner, who passed away during the year, has not taken his or her required distribution for the year, then the beneficiaries are required to take out that amount based on their percentage ownership. For example, if two siblings inherited 50% each from a mother’s IRA account, each sibling must take half of what the mother was required to take out that year by the end of the year in which she died. Those are the only required distributions for that calendar year. In the following year the inherited IRA beneficiaries are required to take 1/10th of the amount that was in their inherited IRA as of December 31st of the year in which the person died. In subsequent years, you drop the denominator by one and take one-ninth and then one-eighth, etc. until the tenth year in which you must fully deplete the balance in the inherited IRA account.

These inherited IRA distribution rules even apply to Roth IRA’s.  The original Roth IRA owner has no required distributions during their lifetime. The same is true if there’s a spousal rollover and the spouse becomes the owner of that Roth IRA. However, once it is inherited by someone else, the individual or individuals who inherit the Roth IRA have the same 10-year distribution rules as they would from owning an inherited Traditional IRA. However, unlike traditional IRAs, the required Roth IRA distributions are not taxable to the beneficiary.

Worth Noting: If a Special Needs Trust for the benefit of an individual with a disability inherits an IRA account, in most cases the Trust can stretch the IRA distributions over the disabled person’s life expectancy. The Trust is NOT required to fully deplete the Inherited IRA over a 10-year period.

The failure to take the required distributions can lead to penalties of up to 25% of the amount that was required to be distributed.

If all of these rules seem complicated, don’t worry, we understand them and are happy to help you avoid the penalties for distribution mistakes.