Suze Orman: Here’s How a New Distribution Rule Affects IRA Heirs
Suze Orman, modern-day money influencer and bestselling author, is also an advocate for everyday people taking charge of their finances. She has made it her mission to pass along the teachings she has learned about achieving personal wealth, and keeping her audience up to date with the latest financial news they need.
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With that in mind, she recently shared some helpful information in a blog post about new distribution rules that affect the heirs of IRAs. If that applies to you, check out what she had to say below — and then take a look at her ultimate tests of financial strength.
2020 Changes to IRA Inheritance Rules
Back in May 2024, Orman let people know that the IRS was announcing a change for the upcoming tax year, with a new rule that would ripple across the account of anyone who gained an IRA by way of inheritance.
Orman noted that with traditional IRAs, beneficiaries had to pay tax on the money as it was withdrawn. This also was applicable to any Roth account, which came with a 10-year rule that stated the money was no longer qualified to be in a tax-advantage account.
Now, under this new set of major tax laws, beneficiaries can no longer take required minimum distributions (RMDs) as determined by their life expectancy. Instead, the laws require the account to be completely empty within the timeframe of 10 years.
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2024 Updates to Required Minimum Distributions
Starting in 2025, if you have inherited an IRA in 2020 or any year since from a person who is currently withdrawing their required minimum distributions from the same account — not including surviving spouses — then you are required by law to make annual RMDs within a 10-year period from the account you inherited.
Orman makes it clear that if this applies to you, then you are able to entirely withdraw the amount immediately. However, if there is a year within the 10-year timeframe that any money remains within the IRA, you then are obligated to take the RMD withdrawal under the new tax laws.
This only applies to owners of IRA accounts that were inherited in 2020 or later, when this rule was implemented, which is good news for many taxpayers. The IRS is not cracking down on RMD withdrawals that are connected to the 2024 tax year — more so, preparing for the 2025 one, which starts in January.
How To Be Strategic With IRA Inheritance and Taxes
Based on these new rules, it’s crucial to look at all angles for minimizing your tax bill. This means, in Orman’s opinion, that once you inherit a large traditional IRA, plan accordingly and be thoughtful about waiting to withdraw a lump sum.
Choosing to wait until the 10th year and then take all the money from the account might push you into a higher tax bracket based on income, which would mean that your tax rate would also go up for that year.
Orman recommends making smaller withdrawals over the course of several years in order to avoid this tax hike on you and your family. That being said, the inverse philosophy applies: should you see that for the next year your wages and earnings will be significantly less, then perhaps that is the right time to take a large amount of money from the IRA you inherited.
Be Aware of New Income Tax Changes in 2025
One last thing Orman highlights is that under current tax policies, current rates on income tax are historically low. But tax legislation from 2017 that set the present day rates are scheduled to expire after 2025, so there will be a change one way or another to take into account.
Make sure to consult with an accountant or financial expert on the best strategy that applies to you if you are someone who has recently inherited an IRA account. You don’t want to miss out on money that is yours, nor do you want to be hit with a larger than expected tax bill. Working with Orman’s advice and a professional can help you find a middle ground that works best.
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This article originally appeared on GOBankingRates.com: Suze Orman: Here’s How a New Distribution Rule Affects IRA Heirs
