With taxes just filed, this new news about requirements on inheritance I felt was timely to pass on. Have you heard about the recent updates regarding inherited retirement accounts? If you’ve received one since 2020, there’s important news from the IRS that could impact your financial planning.
First, a bit of background: A law passed in 2019 changed how inherited IRAs need to be handled. Previously, people could stretch the withdrawals from these accounts across their lifetimes. But the new rule says that most people (other than spouses) need to empty these accounts within 10 years. However, many misunderstood this to mean they could wait and take out all the money in the tenth year, potentially reducing their taxes as the account continued to grow.
Then, in 2022, the IRS proposed that if the original owner was already taking out money regularly, the inheritors must also take out money annually during the 10-year period. This caused quite a stir as it was a bit complicated to figure out.
Responding to the confusion and complaints, the IRS has decided to put a pause on enforcing this. They won’t penalize anyone for not taking these required minimum distributions (RMDs) until they finalize the rules. This pause has been extended through 2024, giving inheritors more breathing room.
Why does this matter? Well, normally, if you don’t take out the RMDs, there’s a hefty penalty—25% of what you should have withdrawn. That’s a significant chunk!
For example, Ralph, a retired bookkeeper from California, inherited a modest IRA from his mother who passed away at 99 years old in 2022. Due to the IRS’s decision, he skipped withdrawing money for 2023 and is waiting to see what happens with the rules for 2024 and beyond.
What’s important to remember is that eventually, the rules will settle, and starting likely in 2025, Ralph and others in his situation will need to plan to take yearly distributions and drain the account by the end of the 10-year period. This is crucial because the timing of these withdrawals could affect your tax bill—timing them wisely could mean paying less in taxes.
Also, if you’ve inherited an inherited IRA (yes, it can get that complicated), you need to continue the distributions as the previous owner did. This keeps the tax advantages rolling but also comes with its set of responsibilities.
So, while the IRS figures out the final details, it’s a good time for inheritors to get their plans in order. It’s not just about following the rules—it’s about making smart choices that suit your financial situation.
Stay tuned, and make sure to consult with a financial advisor to navigate these changes wisely. If you need an introduction to a financial advisor that we trust, reach out.
In A Nutshell . . .
New laws around finances can be made complicated and definitely complex, but understanding these details will help you manage your inheritance effectively!