Reviews 4,000+ verified REVIEWS
Pricing plans
Compare all plans
Tax guide
Pricing plans
Compare all plans
Tax Guide
All articles

Updated IRS guidelines for inherited retirement accounts

Updated IRS guidelines for inherited retirement accounts

The IRS has announced an extension through 2024 for the enforcement of required minimum distributions (RMDs) from certain inherited retirement accounts.

This decision allows heirs additional time to strategically plan their withdrawals, following changes made by legislation in 2019.

Detailed implications for heirs

Background on the 2019 law

The 2019 Secure Act significantly altered the landscape for non-spousal beneficiaries of retirement accounts by mandating that inherited accounts be emptied within a 10-year period instead of over the beneficiary's lifetime.

This shift was intended to accelerate the distribution and tax collection from retirement savings that were previously allowed to grow tax-deferred for extended periods.

IRS's postponement response

The IRS's recent postponement responds to confusion and concerns among beneficiaries, especially regarding when and how much to withdraw annually if the original account owner had already started taking distributions.

This relief allows heirs to delay these withdrawals without penalties until the end of 2024, providing crucial time to consult with tax advisors and financial planners to optimize tax implications.

Key points for beneficiaries

  • Deadline extension: Beneficiaries can now wait until the end of 2024 before taking RMDs.
  • Penalty relief: The IRS will not impose penalties for missed RMDs during this extended period.
  • Future obligations: Starting in 2025, beneficiaries must resume RMDs and adhere to the 10-year depletion rule established by the 2019 law.

Impact on tax planning

This extension offers a critical opportunity for tax planning.

Beneficiaries might:

  • Defer income: Delaying distributions can help beneficiaries manage their tax brackets more effectively, particularly if they are near retirement or expect to have lower income in future years.
  • Strategic withdrawals: Beneficiaries can plan distributions in years when they expect lower personal income, potentially reducing the tax burden of the distributions.

Who still needs to comply without delay?

  • Spousal heirs and other exceptions: Spouses and beneficiaries like the chronically ill, who are generally exempt from the 10-year rule, must continue taking distributions based on their life expectancies.
  • Pre-2020 heirs: Those who inherited accounts before 2020 are not affected by the 2019 law changes and continue under the old rules, requiring distributions over their expected lifetimes.

This policy adjustment by the IRS underscores the importance of staying informed on retirement and tax laws, as changes can significantly impact financial planning strategies.

For those managing inherited retirement accounts, this extension could be pivotal in optimizing financial outcomes.

Ines Zemelman, EA
Founder of TFX