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The Fourth Consecutive Year of Inherited IRA Adjustments

Kevin Nolte May 06, 2024

It’s time we dust off our annual “Inherited IRA Change” article. Last year, Jeff DeHaan summarized the IRS refinement of what the 10-year distribution rule actually entails and to which accounts it applies in this article. I recommend reading Jeff’s article as the rule itself has not been changed, but I will briefly summarize:

Most Individual Retirement Accounts (IRAs) inherited from non-spouses post January 1, 2020 must be fully distributed within 10 years of receiving. During those 10 years, the beneficiary is required to take a distribution every year, and cannot simply take a lump sum in year 10.

The change for 2024 is that the penalty for missed Required Minimum Distributions (RMDs) in 2024 will be waived similarly to 2023. There will be no penalty owed in 2025 if a distribution is not taken in 2024 from an inherited IRA subject to the 10 year rule.

While this increased flexibility in withdrawal options is appreciated, it may be advantageous to still take a distribution in 2024 if you are not required to do so. Even though the penalty is waived, the 10 year clock for distributions is still running. For example, if you inherited an IRA in 2023, it must be liquidated by 2033, as an extra year is not provided as part of this IRS relief. This means forgoing distributions in one year will likely lead to larger distributions later on, potentially resulting in a higher total tax bill.

The decision of if, when, and how much your inherited IRA distribution should be continues to be a nuanced calculation. Factors including your income, spending, and dynamic of your balance sheet need to be considered. Beyond those personal considerations, we expect income tax rates to change in the future, further complicating the equation. Contact the CCP planning team or your advisor to create a tax efficient withdrawal strategy that aligns with your goals.

Kevin Nolte

disclosure

THIS COMMENTARY HAS BEEN PREPARED BY CLEARWATER CAPITAL PARTNERS. THE OPINIONS VOICED IN THIS MATERIAL ARE FOR GENERAL INFORMATION ONLY AND ARE NOT INTENDED TO PROVIDE OR BE CONSTRUED AS PROVIDING LEGAL, ACCOUNTING, OR SPECIFIC INVESTMENT ADVICE OR RECOMMENDATIONS FOR ANY INDIVIDUAL. ALL ECONOMIC DATA IS DERIVED FROM PUBLIC SOURCES BELIEVED TO BE RELIABLE. TO DETERMINE WHICH INVESTMENTS MAY BE APPROPRIATE FOR YOU, PLEASE CONSULT WITH US PRIOR TO INVESTING. INVESTING INVOLVES RISK WHICH MAY INCLUDE LOSS OF PRINCIPAL.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities, insurance products, or to adopt any investment strategy. The opinions expressed are as of the date of writing and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Clearwater Capital Partners to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. S&P 500 is a registered trademark of Standard & Poor’s Financial Services, a division of S&P Global (“S&P”)  DOW JONES, DJ, DJIA and DOW JONES INDUSTRIAL AVERAGE are registered trademarks of Dow Jones Trademark Holdings (“Dow Jones”). The two main risks related to fixed-income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments.

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