Heirs Finally Get an Answer From IRS About Money in Inherited Retirement Accounts - WSJ

[question everything]

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.

(snip)

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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[BComplex]

1. This is a terrible law! People whose spouse dies need to be able to support themselves monthly as long as they live

and not end up having to move funds around.

[ret5hd]

3. spouses are exempt

[BComplex]

4. Oh! Good to know.

I am one. Luckily, my husband is very much alive and mowing grass!

[progree]

8. To be clear, a married couple filing taxes jointly (and who inherit an account) are also subject jointly to the

Last edited Tue Jul 23, 2024, 07:20 PM - Edit history (1)

10 year requirement just as a single person is. And under the new rules, must take a minimum amount each year rather than being allowed to hoard it all until year 10. So the married couple doesn't get any breaks. [1]

If one spouse then dies, the other spouse automatically becomes the new sole owner and continues to follow the same rules as before (though the surviving spouse's tax bracket might increase as often happens). So if the spouse dies in year 4 of the 10 year period, for example, the surviving spouse still has 6 remaining years to empty out the account (again with annual minimum RMDs under the new rules. Edited to add: Maybe the RMDs change under the new rules, I don't know /Edit).

I don't know what happens if a single person who inherited an IRA account dies (or the remaining spouse dies), I *think* their inheritor(s) (children, siblings, friends, whoever is on the retirement accounts beneficiary form) gets to continue with the same schedule, just like the surviving spouse in the above paragraph.

[1] Edited to add Actually I'm confused a bit about the joint thing. Lets say I'm married to Sally. My sister passes away and I am named the beneficiary (not my spouse and I). That would usually be the case -- that a person, not a couple -- is the named beneficiary. So it's my IRA as far as tax rules, not Sally and mine. But that doesn't make a difference I don't *think* in RMD requirements or the amount of taxes paid if we are filing married filing jointly.

2nd Edit I'm not a tax professional. Nor have I ever been married. I read a lot on taxes, including how married couples are affected, but I haven't ever filed taxes as married.

[PJMcK]

5. Consider this

The reason the law requires liquidation of the inherited IRA is to keep rich families from hoarding vast sums in tax exempt accounts. By requiring those accounts be liquidated, that money recirculates into the economy.

It’s not perfect but that’s the purpose of the requirement.

[BComplex]

6. That's good, then.

[bucolic_frolic]

2. Clear as mud, Roth accounts not mentioned

Are they making people amend tax returns since 2010?

And didn't SCOTUS Federal agencies now have to bow to SCOTUS?

So lawsuits will now fly?

For people inheriting modest amounts, this seem a lot of hullabaloo. Take it out with one hand and feed a new traditional IRA with the money.

[progree]

7. Some questions answered

Because there has been confusion about the new rules, many people didn’t take distributions in the last several years. The IRS has essentially excused them, saying it won’t penalize people in this situation for failing to take required payouts for the years 2021 through 2024.

You have to start taking annual withdrawals in 2025, with the calculation of how much based on your life expectancy. If you were worried about having to make a big payout in 2025 because you skipped withdrawals from 2021 through 2024, that won’t be the case.

If someone died and left you an IRA before they had to take withdrawals, you are allowed to take the money out any time during the 10-year period

((beware though about taking out the least amount that you have to - and then having a big balance that one must take out in year 10, which might push you up a tax bracket or two. Probably better to take out a chunk every year so you don't have so much left in year 10 -- as the lost benefit of a few extra years of tax-deferred compounding would not make up for the tax hit of paying taxes in year 10 at a higher marginal tax rate -Progree))

The best type of IRA to inherit is a Roth IRA. You don’t have to take the money out until the 10th year, and withdrawals are generally tax-free.

Emphasis added

[no_hypocrisy]

10. Just spoke to my Broker.

I inherited an IRA from my late father and am a beneficiary to the account. It was activated nine years ago.

My Broker told me that the new IRS regulation went into effect in 2020 and I'm grandfathered in. IOW, the regulation does affect my account.

Call your broker if you have any concerns.