The IRS Changed the Rules for Inherited IRAs – Again!

  • Estate Planning
the irs changed the rules for inherited IRAs again estate and probate legal group

For anyone who inherited a traditional 401(k) or IRA account in 2020 or later… read on because the IRS has changed the rules again.

In the past, if someone has an inherited IRA, they could take out the Required Minimum Distribution (RMD) payment each year that was set by the IRS and stretch this out for many years, deferring the final taxable payout.

But not anymore.

The New Interpretation of Rules for Inherited IRAs

Initially, the SECURE Act eliminated the stretch IRA for non-spouse beneficiaries (such as children and grandchildren). It was replaced with the ’10-year rule’. This states that the person who inherited the IRA must withdraw the funds by the end of the 10 years after the original owner’s death. It was thought that no distribution would be required in the first nine years, and there would only be one minimum distribution and then the balance of the IRA inherited at the end of the 10 years.

But according to the IRS interpretation of the SECURE Act, if you are a non-spouse who inherited an IRA, you cannot wait until year 10 to take the money out. Instead, you have to take annual distribution in years 1-9 and the balance of the IRA in year 10. This can cause tax nuances for the individual because RMDs are taxable, and the total amount is withdrawn on year 10. However, Congress did leave the stretch role for people with disabilities or close in age to the decedent.

If the beneficiary fails to withdraw the RMD, there is a 50% penalty on the amount that should have been taken out.

What to Do if You have an Inherited IRA

Suppose you have been recently named a beneficiary to an IRA and were not aware of the Retirement Minimum Distribution laws and have waited before you started to withdraw any money. Many experts advise you to wait until the end of the year to see if the IRS issues either a final RMD regulation or if there is any blanket reprieve for those who did not take the beneficiary RMDs.

But you should immediately speak with your experienced estate attorney to decide what is best for you and your IRA inheritance.

DuPage and Cook County Will and Trusts Attorney

Do you have questions about your IRA inheritance? Choosing an experienced estate planning attorney is important to determine the best decisions concerning your inheritance. To schedule a consultation with the experienced estate planning attorney at  Estate and Probate Legal Group, call us at 630-864-5835.

AREAS WE SERVE: Cook, DuPage, Kane, Lake and Will counties