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Todd Villarrubia

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IRS Postpones Required Withdrawals from Inherited Retirement Accounts

Posted On: May 15, 2024

By: Todd Villarrubia

Todd M. Villarrubia, an authority in wealth planning and preservation, brings over 30 years of in-depth, experience to the complex challenges of safeguarding familial and individual wealth. Based in New Orleans, Louisiana, his expertise is not only recognized in the local community but also reverberates within the legal industry.
Withdrawals from traditional inherited retirement accounts are treated as income by the IRS, so the timing of these distributions matters for tax strategy.

The latest from the IRS is good news for people who have inherited retirement accounts since 2020, according to The Wall Street Journal article “Heirs Get More Time to Keep Their Money in Inherited Retirement Accounts.” The IRS announced it was postponing enforcement of a law originally passed in 2019, then revisited in February 2022 when the IRS proposed a change to rules mandating RMDs.

The 2019 law required retirement account heirs to empty IRAs within ten years instead of over their expected lifetimes. This was a major change, eliminating the stretch IRA, which had been enjoyed for many years. The stretch IRA allowed IRA beneficiaries to keep money in inherited IRA accounts for extended periods, allowing the IRA to grow tax-free and giving heirs advantageous flexibility with the accounts.

In 2022, the IRS proposed rules mandating annual withdrawals during the ten-year period if the original account owner had started taking RMDs before they died. This put estate planning concerning IRAs in a tailspin. Most IRA heirs planned on letting the assets in the accounts grow for ten years, then emptying the account at the ten-year mark.

The IRS was apparently listening, since the proposed rules led to a great deal of complaints from both taxpayers and the financial services sector. The rules were already confusing, the proposed rules were even more restrictive, and no one knew what to do.

The recent announcement from the IRS said it won’t impose any penalties for missing the RMDs until the details of how inherited (or beneficiary) IRAs are finalized. The reprieve has been extended to December 31, 2024. Penalties are expensive, so this announcement has been met with great relief from IRA heirs and estate planning attorneys alike.

To illustrate, let’s say a 66-year-old person inherited a parent’s $200,000 IRA in 2020. If it weren't for the IRS relief through 2023, they would have had to use $26,000 of the IRA so far to pay taxes on the RMD, and the 2024 RMD would have been about $9,000.

The issues aren’t just for heirs knowing what to withdraw from accounts. For those with IRA accounts they plan on leaving to heirs, changing distribution rules may impact how they use or bequeath IRAs. Does it make more sense to convert a traditional IRA to a Roth IRA, where taxes are paid upfront and the distribution of beneficiary accounts is considerably less restrictive? Or should they spend the entire IRA and save other assets for heirs?

Estate planning attorneys will continue to help people navigate this and other IRA-related estate planning matters. The rules may change again. However, keeping your estate plan up to date to take advantage of changing rules is the best approach to safeguarding your legacy.

Reference: The Wall Street Journal (April 17, 2024) “Heirs Get More Time to Keep Their Money in Inherited Retirement Accounts”

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