After much anticipation, the IRS has provided clear guidance on how heirs should handle inherited retirement accounts. This update stems from a retirement law, enacted in 2019, which mandated that many people who inherited individual retirement accounts or 401(k)s must withdraw the funds within 10 years. This long-awaited clarification will undoubtedly help investors make more informed financial decisions regarding an inheritance. The guidance below applies to both future inheritors and the many people who inherited accounts since 2020.
Key Points
- Exemptions for Spouses and Pre-Distribution Deaths: The new rules do not apply to spouses inheriting an IRA or if the IRA owner passed away before required distributions began (currently before age 73).
- Annual Withdrawals for Other Heirs: If the deceased was required to take withdrawals, heirs must start annual payouts the year after the death. This primarily affects children, grandchildren, siblings, and friends.
- IRS Penalty Relief: Missed distributions from 2021 to 2024 are excused, and the penalty for missed withdrawals going forward has been reduced from 50% to 25%.
- No Extension on the 10-Year Rule: Heirs who inherited IRAs from 2020 to 2023 must adhere to the 10-year rule, starting annual withdrawals in 2025, based on life expectancy.
- Withdrawal Periods: Inherited IRAs from 2020-2023 must start annual withdrawals in 2025, based on life expectancy. Or if the original owner died before required distributions, you have a 10-year window for withdrawals.
- Complexities with Multiple IRAs: Be mindful of different rules for multiple IRAs, especially when managing both personal and inherited accounts.
- Roth IRAs: The best type of IRA to inherit is a Roth IRA, as you can wait until the 10th year to withdraw, and the withdrawals are generally tax-free.
To discuss how these changes might impact your inheritance planning and to ensure you’re taking full advantage of the new guidelines, please contact your NorthCoast advisor.
