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Possible changes on inherited IRAs

An IRS proposal could change how inheritors of IRAs are required to draw down those accounts.

The IRS wants most non-spouse inheritors of traditional IRAs to make annual withdrawals from the retirement accounts—and potentially pay taxes on the proceeds—until the IRA is closed out after 10 years. The withdrawal amounts would be determined by the inheritor’s age and use IRS life expectancy tables.

A 10-year drawdown has been in effect since 2020 for those who inherit IRAs. But the proposed rule would be a departure from current practices, which assume that as long as inheritors empty the money in 10 years, they can make withdrawals at whatever pace best suits their circumstances.

Though it is officially a proposed rule, the IRS already incorporated the annual withdrawal requirement in its instructions for taxpayers in Form 59o-B, which explains how to treat distributions from IRAs for 2021 income taxes.

“While the proposal has certainly raised concerns about how to handle distributions, this may be one instance where investors are better served allowing the process to play out,” Kyle Tetting said.

As proposed, the required annual withdrawals would apply to inherited traditional IRAs whose original owners had been subject to required minimum distributions (RMDs) before they died. If IRA owners died before reaching RMD age—72 as of 2021, 70½ prior to that—their beneficiaries wouldn’t need to take annual withdrawals. Likewise, because Roth IRAs do not have RMDs, individuals inheriting Roth IRAs would be allowed to continue setting their own schedules for the 10-year drawdown.

Spouses who inherit IRAs are subject to their own age-based RMDs and do not have to draw them down in 10 years.

“Adding uncertainty around this proposed rule to the already complicated tax code further highlights the need to work with a trusted tax professional,” Kyle said.

The IRS is seeking comments on its proposal through May 25, which suggests changes, if any, are months away.

“Landaas & Company continues to monitor developments along with our account custodians to ensure we understand the changing landscape,” Kyle said.

Learn more
The proposed rule on inherited IRAs, in the Federal Register
IRS Publication 590-B
Naming beneficiaries: Communicate clearly, a Money Talk Video with Mike Hoelzl
Keeping family in the financial loopa Money Talk Video with Isabelle Wiemero
When a loved one passes, what happens to their accounts?, by the Financial Industry Regulatory Authority
(initially posted March 31, 2022)

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