Five Reasons to Distribute from Inherited IRAs Now

After several delays, the IRS has issued final regulations with respect to required minimum distributions (RMDs) on inherited IRAs. Effective beginning in 2025, the final regulations look to whether the original owner reached their “required beginning date” to take RMDs prior to death. This date, or more precisely, age, is the key to determining whether or not most non-spousal beneficiaries must take RMDs during the 10-year period beginning on the date of death of the original owner. For many years, the required beginning date was age 70.5, but recent changes now provide for potential required beginning dates at age 70.5, 72, 73 or 75, depending on the original owner’s date of birth. The table below summarizes the required beginning date for original owners.

If the original owner reached their required beginning date, i.e., they were taking RMDs prior to death, the beneficiary must also take RMDs, whereas if the original owner did not reach their required beginning date, the beneficiary has ultimate flexibility, and can even wait until year-10 to begin taking distributions if they so choose. Either way, beneficiaries must completely liquidate the inherited IRA by the end of year 10.

For some beneficiaries, the opportunity to only take the minimum, or nothing at all, may seem attractive. They want value to build up in the account, as well as to defer income taxes to later years. There are, however, compelling reasons to consider taking distributions now rather than waiting. Here are five reasons beneficiaries may want to consider immediate distributions:

1. Ability to manage and smooth income –While missed distributions will not incur penalties in 2024, the clock continues to tick, and options become more limited the closer you get to the end of the 10-year period. Some beneficiaries may prefer predictability and the opportunity to plan with immediate and regular distributions over time. Others may be textbook procrastinators, and depending on the size of inherited assets, waiting until year 10 could cause an overall larger tax bill than periodic distributions. For example, most beneficiaries will have a lower overall tax burden by taking distributions of $100,000 per year over 10 years rather than waiting until year 10 and distributing a lump sum of $1 million.
2. Large deductions can balance additional income — Beneficiaries may be in a lower tax bracket but have large itemized deductions, such as medical expenses and charitable donations, which will offset the additional income. Taking distributions each year may make more effective use of these deductions.
3. Repositioning within a tax bracket If the beneficiary is in a lower tax bracket, withdrawing enough to “fill in” the tax bracket could be beneficial. For example, a married couple with $250,000 of taxable income sits in the 24% tax bracket and could take in additional income of $133,900 in 2024 without jumping up to the 32% tax bracket.
4. Higher tax rates coming? As we await the results of this year’s election, the highest individual tax rate is set to return to 39.6% beginning in 2026. This combined with the potential for a lower standard deduction and the return of the dreaded AMT for most high-income taxpayers, could have a substantial impact on beneficiaries’ tax bills if they wait too long.
5. Cash is king —Beneficiaries may simply need cash now for day-to-day expenses or major purchases where they do not want to take on debt at a high interest rate. Pulling cash from the inherited IRA can make a lot of sense in many situations.

While taking advantage of income deferral can be the right strategy for some beneficiaries, others will find that continued RMDs help them manage their taxes, plan for the future, and provide for future generations. Each beneficiary is unique, and therefore, should consult with their tax and financial planning professionals to see what approach works best for them.