Heirs Get More Time to Keep Their Money in Inherited Retirement Accounts
Many Americans who inherited retirement accounts since 2020 wont be required to start pulling money out this year after the Internal Revenue Service said it was further postponing enforcement of a law passed in 2019.
Part of the law required most inheritors other than spouses to empty IRAs within 10 years, not over their lifetimes, as was previously allowed. Many heirs interpreted this to mean that they could hold off pulling money out until year 10, allowing them to time their withdrawals to lower their taxes while the balances continued to grow. Then, in February 2022, the IRS proposed rules mandating annual withdrawals for these inheritors during that 10-year period, if the original account owner had already been taking distributions.
After complaints from taxpayers and financial-services companies over how to follow the new rules, the IRS said it wouldnt impose penalties for missing required minimum distributions, or RMDs, until the details could be finalized, essentially allowing these inheritors to skip taking money out. That reprieve has now been extended through 2024. The penalty for failing to take required IRA payouts is assessed at 25% of the amount that should have been taken out.
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Withdrawals from traditional inherited retirement accounts are treated as income by the IRS, so the timing of these distributions matters for tax strategy. For someone on the cusp of retirement, the delay could reduce taxes.
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Things get even more complicated for successor beneficiaries, those who inherit an inherited account.
Consider a 75-year-old grandmother who inherited an IRA before 2020 from an older brother. She started taking annual distributions based on her life expectancy. Then she died in 2020 and left her inherited IRA to her granddaughter. The granddaughter is required to continue taking annual distributions and deplete the inherited IRA by the end of 2030, using the grandmothers life expectancy. She will get the reprieve for 2021, 2022, 2023 and 2024, leaving six years to empty the account.
If the brother had been younger than the grandmother and died while taking distributions, the granddaughter would still have to empty the account by the end of 2030, but she would take annual distributions based on his longer life expectancy, increasing the amount the IRA could grow tax deferred.
More..
https://www.wsj.com/personal-finance/retirement/inherited-retirement-account-ira-irs-c3c95273?st=veahuligmhk5fsj&reflink=desktopwebshare_permalink
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(Don't ask me, I just post it here..)
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bucolic_frolic
(45,600 posts)And leaving money to heirs? You may want them to enjoy your generosity, but they do things differently than you would do. You often don't get prudence, stability, or a foundation with a windfall. You get a good time. May as well be yours and not theirs.
IbogaProject
(3,291 posts)Can't expect Congress or the IRS to go after the wealthy nor their dynasty trusts. This is just for the easy to enforce against little people. Know your place serfs.
jimfields33
(17,887 posts)The government needs the revenue. In fact, put the revenue towards the debt. Wouldnt it be nice for the federal government not to have to pay the debt and use the money for other things?
nitpicked
(461 posts)No matter what age beneficiaries are, the shorter the timespan for withdrawing the inherited IRA funds, the greater the likelihood that, if the IRA is large enough, it will cause a move to a higher tax bracket in one or more withdrawal y.ears.
There can be more issues for older persons. Let's take a 67 year-old new Federal retiree, non-spouse beneficiary of someone who died in 2023. He saved under both traditional and Roth IRAs, and the Thrift Savings Plan (traditional). Is it best to take the 10 years to finish withdrawing money from the inherited IRA?
Maybe not. In 2030, he will be 73 and must take 2 required distributions from both the traditional IRA and TSP. If he invested in TSP's C fund, he could be one of those TSP millionaires, or maybe a bit less. To round this, $810000/27= $30000 RMD a year to withdraw. Add the IRA RMD, plus SS and the federal pension, and annual income could push into the next tax bracket, especially if also withdrawing inherited IRA money.
New Federal retirees have to enroll in Medicare A&B. Higher incomes may lead to higher Medicare premiums two years later.
Especially if you are older, get advice first.