Should Owners of Inherited IRAs Skip RMDs?

With a few notable exceptions,¹ most nonspouse beneficiaries who inherit a traditional IRA after 2019 must deplete the account—and pay taxes on those funds—within 10 years. What's more, if the original owner was taking required minimum distributions (RMDs) from the account at the time of their death, the beneficiary must continue to take an annual RMD.

So, when the IRS waived RMDs from inherited IRAs for 2024—for the fourth year in a row—it purportedly did inherited IRA owners a favor. But that continued exemption cuts both ways.

"The good news is it gives you greater control over your income in the exempted years," says Chris Kawashima, CFP^®, a director at the Schwab Center for Financial Research. "The bad news is the 10-year clock is still ticking, so you may need to withdraw even more in future years if you skip RMDs this year or have done so previously." Indeed, even if you take the required minimum distribution each and every year—including exempt years—you could still end up with an uncomfortably high tax hit.

Consider a 55-year-old woman who inherits a $500,000 IRA from her mother. Based on her own life expectancy, her first RMD will be just $15,823. If the account grows at a modest 5% annually over the next 10 years, withdrawing just her RMD each year will require that she take out more than $556,000 in the 10th year—potentially pushing her into the highest tax bracket.

"Whether you're subject to RMDs or not, you should create a withdrawal plan that considers your tax situation over the life of the inherited account," Chris adds. For example, if the IRA balance is large, you might withdraw enough every year to max out your current tax bracket without pushing you into the next one so that you don't wind up with an outsized withdrawal in the 10th year. Conversely, if you expect to have lower income in a few years—perhaps because you're going back to school or approaching retirement—you may wish to take smaller withdrawals until you move into a lower tax bracket.

"Whatever your specific circumstances, be sure to run the numbers with the help of your tax advisor or financial planner," Chris says. Your Schwab financial consultant can help you think through your RMD withdrawal strategy. Call today to schedule an appointment.