Updated Required Minimum Distribution (RMD) Rules for Inherited Retirement Accounts
The IRS just offered clarity on the 10-year rule for inherited IRA’s and other tax deferred retirement vehicles. This statement is clarifying the rules set forth in the 2020 SECURE Act that outlined how beneficiaries must withdraw money from those inherited tax deferred accounts.
How most people understood the rule to be was:
You must withdraw everything from these accounts on or before the 10th year after the original owner has passed, but it does not matter how frequently you withdraw as long as all of the money is out of the account by the 10th year.
Let’s take a look at an example:
Jenny inherits an IRA with a balance of $100,000 from her father after he passes in 2021. Under previous understanding of the rule, Jenny could withdraw zero dollars in each year until 2031, then in 2031 take out the entire balance of the account and satisfy the rule with no penalty.
With the clarity provided by the IRS, this is how the rule should actually be followed:
Jenny inherits an IRA with a balance of $100,000 from her father after he passes in 2023. She must now take 1/10th in 2023 (provided her father had not satisfied his RMD for 2023 already) or $10,000 in 2023. In 2024 she must take $10,000 again, and so on and so forth until the account is depleted by the 10th year.
The good news is, the penalty for not following this rule in 2021 or 2022 has been waived. So if you have not been withdrawing like this you will not face any penalty for the past years. However, in 2023 these rules will go into effect. Going forward we will be advising to take equal withdraws each year going forward so that your inherited account will be emptied by the 10th year after the death of the original owner.
Let’s take another look:
Jenny inherits an IRA from her father with a balance of $100,000 after his passing in 2020. She has not withdrawn any money from this account since she had planned to withdraw all of the money to live off of in the 10th year after his passing (2030) when she is choosing to retire. However, with the new rules now she will have to take 1/7th of the balance out starting in 2023 (because she missed the first 3 years of withdrawals) each year until the balance is depleted in 2030.
If you or someone you know is receiving an inheritance any time soon, or has received one since 2020 - reach out and we can help develop strategies aimed to reduce your tax liability. We also offer in-depth planning strategies that help you pursue your goals most efficiently. Nobody likes paying taxes, find out how in-depth financial planning can potentially reduce your tax liability.
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.