Don’t be surprised if your clients start coming to your office with questions about a recent article about the IRS’s distribution rules for inherited IRAs.  

What’s the back story? 

Until the law changed a few years ago, a client who was named as the beneficiary of an IRA could count on a relatively straightforward and tax-savvy method of withdrawals called the “stretch IRA.” With the passage of the SECURE Act, that changed for many clients who inherited an IRA after December 31, 2019. Instead of taking distributions over their lifetimes, beneficiaries would need to withdraw the entire inherited IRA account within a 10-year period.

What’s the problem now? 

Unfortunately, the IRS rules are clear as mud. Concern escalated when the IRS issued proposed (but not yet final) regulations earlier this year. Advisors and their clients are facing a discrepancy between what had been understood immediately after the SECURE Act was passed, and what the IRS has included in the proposed regulations.  

According to the proposed regulations some non-spouse beneficiaries must begin taking annual distributions immediately following the inheritance and throughout the statutory 10-year period instead of waiting until the 10-year post-inheritance mark to fully withdraw the funds in a lump sum. This is a hard pill to swallow for beneficiaries who were counting on years of additional tax-free growth and who had hoped to defer an income tax hit until a lower-income year. 

The situation is complicated but worth understanding (we like this very clear article) because of the potential headaches the proposed regulation could cause for your clients who are caught in the gray area.     

A charitable giving opportunity? 

Anytime you are talking about IRAs, including inherited IRAs, you’ll want to make sure your client knows about Qualified Charitable Distributions (QCDs). With a QCD, a client who is 70½ or older can use a traditional IRA to distribute up to $100,000 ($200,000 for a couple) per year to a qualified charity, such as a Designated Fund or Field of Interest Fund from the Omaha Community Foundation, to meet the Required Minimum Distribution. The distribution isn’t reported as taxable income because it goes straight to charity, which can significantly lower your client’s tax bill. 

For your clients with inherited IRAs caught in the confusion of the proposed regulations for SECURE Act, a Qualified Charitable Distributions could come in very handy. The IRS does permit taxpayers to make QCDs from inherited IRAs. This option could be a welcome relief to clients who are facing the more stringent proposed IRS regulations governing the payout requirements for inherited IRAs. 

Please contact the Omaha Community Foundation’s Donor Services team if you have questions about how your clients can use their IRAs to support their favorite charitable causes. You can reach us at 402-342-3458 or giving@omahafoundation.org.