When you inherit an Individual Retirement Account (IRA), it’s important to understand the rules surrounding Minimum Required Distributions (MRDs) — often referred to as Required Minimum Distributions — especially under Michigan law and federal regulations. Failure to comply with MRD rules can result in significant tax penalties, so knowing the basics is essential for beneficiaries managing an inherited IRA.
What Are Minimum Required Distributions?
Minimum Required Distributions (MRDs) are the minimum amounts that the IRS requires you to withdraw from certain retirement accounts annually, starting at a specific age or after inheritance. These rules exist to ensure that funds in tax-deferred retirement accounts eventually get taxed.
For inherited IRAs, MRD rules depend on several key factors (the “Key Factors”), including:
- The date of death of the original account owner
- The relationship of the beneficiary to the decedent
- Whether the beneficiary is an individual, trust, or estate
- Whether the original account owner had already begun taking MRDs
Key Federal Rules Impacting Inherited IRAs
The most notable change to inherited IRA distributions came with the SECURE Act of 2019, which significantly altered how non-spouse beneficiaries must handle inherited IRAs.
Under the SECURE Act:
- Most non-spouse beneficiaries must withdraw the entire IRA balance no later than 10 years of the original owner’s death, and potentially much sooner depending on Key Factors (the “10-Year Rule”).
- Spouses, minor children of the decedent, disabled or chronically ill individuals, and beneficiaries who are not more than 10 years younger than the decedent may qualify as Eligible Designated Beneficiaries (EDBs) and are allowed to take distributions over their life expectancy.
- Note that if a minor child inherits the IRA, the 10-year clock starts ticking once they reach the legal age of adulthood.
The SECURE Act 2.0, signed into law in December 2022, clarified and modified some provisions, but the 10-year rule largely remains intact.
Michigan-Specific Considerations
While MRD rules for inherited IRAs are primarily governed by federal tax law, Michigan residents should keep a few state-specific considerations in mind:
- Michigan Income Tax: Michigan does not tax IRA distributions in the same way as federal law. Most retirement income, including IRA distributions, is partially or fully exempt depending on the age of the taxpayer and the year they were born. Inherited IRA distributions are included in this calculation, and eligibility for deductions varies.
- Estate Planning Implications: Michigan law does not override federal MRD requirements, but estate plans in Michigan must account for the distribution timelines and tax impacts of inherited IRAs. Designating the right beneficiaries — and structuring trusts properly if they are named as beneficiaries — is crucial to avoid triggering accelerated taxation or unfavorable withdrawal terms.
- Probate Avoidance: Naming individual beneficiaries directly on IRA accounts can help avoid probate in Michigan. However, improper designations (e.g., naming an estate) can complicate MRDs and lead to the 5-year withdrawal rule for non-designated beneficiaries.
Best Practices for Michigan Beneficiaries
If you’ve inherited an IRA in Michigan, here are some tips:
- Confirm your beneficiary status (spouse, non-spouse, trust, etc.)
- Identify the original owner’s date of death, and whether they had started MRDs
- Consult with a financial advisor or estate attorney to plan your withdrawal strategy
- Be mindful of Michigan income tax rules related to retirement distributions
- Avoid costly IRS penalties by ensuring timely and correct distributions
Final Thoughts
Navigating the MRD rules under an inherited IRA can be complex, especially with recent legislative changes. If you’re a Michigan resident who has recently inherited an IRA, taking the time to understand your options — and your obligations — can save you from unexpected taxes and penalties. It’s always a good idea to work with a qualified estate planning attorney or tax advisor who can help you make informed decisions based on your unique situation.
If you have inherited an IRA and would like further assistance, please contact us!
Disclaimer: The information provided in this blog article is for general informational purposes only and does not constitute professional advice. Readers are encouraged to consult with a qualified professional for any specific needs or concerns.