Penalties could be imposed if these withdrawals are not made starting next year.
The IRS has announced final rules that detail the amounts that must be pulled out yearly from inherited Individual Retirement Accounts (IRA).
An inherited IRA is opened when someone
inherits an IRA plan and assets are moved from the original owner to the beneficiary’s account. Before the SECURE Act 2.0 was
passed by Congress in 2022 and signed into law, beneficiaries could withdraw funds from an inherited account at their discretion. Now, beneficiaries must pull out all funds within 10 years of the original owner’s death.
On July 18, the IRS issued final
rules on such withdrawals. The rule is related to the required minimum distributions (RMD), or the minimum amounts that IRA owners have to withdraw from their accounts each year when they reach a certain age.
If the original owner had begun RMDs before their death, the beneficiary of the inherited account would have to continue the withdrawals as well, according to the IRS.
The Department of the Treasury and the IRS
reviewed public comments arguing against the move. The comments suggested that beneficiaries not be forced into making RMDs yearly. Instead, beneficiaries must be allowed to withdraw the funds as they wish within the 10-year period.
“However, Treasury and IRS determined that the final regulations should retain the provision,” the tax agency stated.
The updated regulation doesn’t apply to beneficiaries if the original account holder died before starting withdrawals. In this case, the person can withdraw the funds anytime within the 10-year period.
The SECURE Act made the RMD rules applicable from Jan. 1, 2020. Not making the required RMD for any year can draw penalties. However, since the rules created confusion among beneficiaries, the IRS had waived penalties from 2021 to 2024.
As such, beneficiaries of inherited accounts are expected to start withdrawals in 2025.
However, the 10-year window will still be calculated from 2021. So, if the original owner died in 2021, the beneficiary is expected to empty the account by 2031. The person only has to begin withdrawals from next year and won’t be penalized for not making RMDs between 2021 and 2024.
Complicated Regulations
The new IRS rules on RMD withdrawals have been criticized as too complicated.“Final Regs (regulations) come in at 260 pages. As far as Regs go, pretty beefy,” Jeff Levine, chief planning officer at Buckingham Wealth Partners,
said in a July 18 post on social media platform X.
“That said, at only 260 pages, there are almost certainly going to be a lot of things NOT covered by the Rgs that IRS will need to address in the future.”
Financial expert Ben Henry-Moreland said in a LinkedIn
post that, while there are a “TON of new rules” in the updated IRS regulations, none of them are game-changing from a financial planning perspective. The rules on RMD withdrawals are a “confirmation of what we already knew.”
However, the new rules do make “retirement accounts (even more) insanely complicated to deal with on a practical level,” he wrote.
“Just for one example, spousal beneficiaries now have 3 different options of how to treat their deceased spouse’s retirement account, each with its own RMD calculation (and associated pitfalls). It’s a choose your own adventure of tax planning, just what everyone wanted!”
The RMD final regulations come as a SECURE Act provision on emergency withdrawals went live earlier this year.
Usually, a person seeking to
withdraw money from a retirement account such as a 401(k) before the age of 59 1/2 would suffer a penalty of 10 percent for such early withdrawals.
However, SECURE 2.0 allowed people to make one withdrawal of up to $1,000 in a year to meet
emergency expenses. This provision took effect in January 2024.
The withdrawn amount has to be repaid within three years. During these three years, no further withdrawals would be allowed unless the repayment is made in full.
