December 09, 2024

New IRS Guidance on Inherited IRAs: What Your Clients Need to Know

The IRS has recently released final regulations regarding inherited retirement accounts, providing much-needed clarity on the “10-year rule” introduced by the SECURE Act in 2020.

Key Changes for Your Clients

The SECURE Act significantly changed how beneficiaries must handle inherited IRAs, effectively ending the “Stretch IRA” strategy. Beneficiaries must now liquidate inherited accounts within 10 years for deaths occurring in 2020 or later. While certain Eligible Designated Beneficiaries (surviving spouses, minor children of the IRA owner, and disabled beneficiaries) are exempt, most of your clients will need to adjust their planning strategies.

The new IRS guidance clarifies several critical points:

  • Some beneficiaries must take distributions during the first nine years after the original owner’s death
  • The entire account must be emptied by year 10
  • Annual distributions are required in years 1-9 if the original owner died after starting their RMDs (unless the beneficiary is an Eligible Designated Beneficiary)
  • The IRS has waived penalties for missed RMDs between 2021-2024. However, those waivers end in 2024.

It’s also worth noting that the required minimum distribution amounts are based on the beneficiary’s age and the Single Life Expectancy Table published by the IRS. While this calculation is intended to spread the distributions over the beneficiary’s life expectancy, the account must still be depleted within 10 years.

Philanthropic Solutions for Your Clients

Three charitable giving strategies that can help your clients manage the tax impact of these required distributions:

Qualified Charitable Distributions (QCDs)

For clients aged 70½ or older, QCDs remain a powerful tool. In 2024, they can direct up to $105,000 ($210,000 for married couples) annually from their IRA as their Required Minimum Distribution directly to the charities of their choice through The Foundation for Delaware County. A QCD offers a trifecta of benefits: Your clients reduce their taxable income, their heirs can inherit more favorable assets like appreciated stock, and their favorite charity receives a sizable gift. These transfers also count toward any required minimum distributions your clients may have for the year.

Gifts of IRA assets are especially advantageous for older adults who can’t itemize their charitable gifts under the current tax law. Plus, new regulations on inherited IRAs mean your clients’ beneficiaries may face a hefty tax burden, but these same assets can go to charity tax-free.

This strategy reduces taxable income without requiring an itemized deduction.

Donor-Advised Funds

Similar to a family foundation but with fewer administrative responsibilities, donor-advised funds offer many advantages to donors, including:

  • Can be funded with cash, stocks, or non-publicly traded assets such as private business interests, cryptocurrency, private company stock, or real estate
  • Immediate tax deduction for the full market value of the contribution when the funds are deposited
  • Bunch donations during a high-income year to maximize the deduction and then parcel out the gifts to charities over time as the assets inside the fund grow tax-free

Split-Interest Gifts

For clients over 70½, charitable remainder trusts and gift annuities provide another avenue for tax-efficient giving. Currently, up to $53,000 of an RMD can be directed to these vehicles as a qualified charitable distribution, offering both income streams and charitable deductions.

How We Can Help Your Client

  • Partner with you to structure gifts that maximize tax benefits
  • Provide detailed analysis of various giving options
  • Provide you with information on giving through an IRA or other charitable vehicles.

We’re available to answer your questions about philanthropy or meet with you and your client – all at no cost.

Interested in learning more? Contact Monika Collins; 610-744-1015