The Department of the Treasury and the Internal Revenue Service (IRS) have released the highly anticipated clarification on inherited IRA accounts for non-spouse beneficiaries. Previous guidance didn’t indicate whether a taxpayer who inherits an IRA account would need to take annual required minimal distributions (RMDs) to comply with the 10-year rule. With additional clarification, you’ll be able to make the financial decisions necessary to lessen your tax burden.
Key Takeaways
- The 10-year rule requires taxpayers who inherit a retirement account to take RMDs annually, emptying the account entirely by the end of the tenth year
- Previously, those who inherited a retirement account were able to stretch their withdrawals out over the course of their lifetime
- If you made a mistake with your inherited IRA account, don’t panic; you have options to make corrections and reduce your penalties
10-Year Rule for Inherited IRAs
SECURE Act 2.0 gave taxpayers more power over their retirement planning in many ways, but it also significantly changed the inherited IRA account withdrawal process. Prior to the passing of the SECURE Act of 2019, taxpayers who inherited a retirement account were allowed to “stretch” their withdrawals over their lifetime, which increased their annual tax savings. The SECURE Act introduced a shorter, 10-year window for heirs to make their withdrawals, which can have a marked effect on tax bills for high-income heirs.
This shorter window brought confusion, as there was no clarification around whether the heir needed to take RMDs or if the entire amount could be withdrawn at the end of the tenth year. Now guidance from the federal agencies has indicated that heirs must take annual RMDS and, at the end of the tenth year after you inherit the deceased’s account, the balance must equal zero.
Inherited IRA RMD Rules
If you have inherited a retirement account from someone who isn’t your spouse, you must check to see if the deceased taxpayer was already taking RMDs before their date of death. If so, you must continue taking their RMDs every year.
If yearly RMDs are missed or you don’t take enough to satisfy the requirements, you will incur a 25% penalty on the amount you should’ve withdrawn. The penalty can be reduced to 10% if the RMD is corrected within two years. Even if you make a mistake here, there are paths you can take to resolve them with a limited negative impact on your tax burden.
Anders Family Wealth and Estate Planning advisors work closely with high-wealth individuals and their families to help guide financial decisions to protect assets for generations to come. To learn more about the difference our advisors can make, and the associated costs, request a meeting below.
