Heirs Finally Get an Answer From IRS About Money in Inherited Retirement Accounts - WSJ [View all]

People who inherit retirement accounts have 10 years to take out the money, and most of them must take out a minimum amount each year, under rules the Internal Revenue Service finalized Thursday.

It used to be that most heirs could stretch out inherited retirement account withdrawals over their lifetimes, meaning decades of smaller payouts and more growth potential. In 2019, a new retirement law said many people who inherited individual retirement accounts or 401(k)s had to take the money out within 10 years.

The law didn’t specify whether people had to take out money each year, or could wait until the final year to take out all of the funds. Investors asked the IRS to do away with minimum annual withdrawals to take advantage of tax savings and allow their money to grow. The IRS’s final rules say money must come out each year for many heirs. The agency said that is what it determined Congress intended.

The rules affect most heirs, but not spouses. The new guidance applies to both future inheritors and the many people who inherited accounts since 2020, who have been in limbo waiting for the rules.

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Withdrawals from traditional retirement accounts are taxable. Following the updated IRS guidance, tax professionals said heirs should be careful if they take out only the required distributions each year. Doing so would mean a balloon distribution in the final year and potentially a big tax bill.

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