New rules for inherited IRAs could change how non-spouses pay taxes on that money.
Previously, beneficiaries of these accounts were able to minimize IRA tax bills by taking withdrawals throughout the course of their lifetimes – which meant the tax liability could also be spread out over that time.
But the 2019 SECURE Act changed that rule, and now has new requirements for non-spouse beneficiaries.
New Inherited IRA Rules for Non-Spouses
For anyone who inherited a traditional IRA on or after Jan. 1, 2020, there are two paths for receiving that money.
First, you could withdraw all of that money at once, incurring taxes on the entire amount.
Or, you could move that money to an inherited IRA that has to be emptied within 10 years after the death of the original owner. This would be a new account that you set up yourself, because that money cannot stay in the original account.
Previously, inheritors were able to take out that money at any point during that 10 year period. But after the rules changed last year, some inheritors may have to start taking annual withdrawals again during that 10 year period.
The good news is that the IRS will not enforce that rule until after 2023. So if you’ve missed a withdrawal, you won’t be hit with the 25 percent fee of the amount that should have been taken out. But after this year, those rules are supposed to kick in again. Make sure you understand the stipulations for your inherited IRA account so you don’t incur fees.
We are still waiting on additional guidance for this rule, but it does make sense to take out some money each year so you don’t have a large distribution at year 10 when you have to take it out. Check the IRS site for new updates.
How much do you have to withdraw?
When you inherit an IRA, you use the IRS Single Life Expectancy Table to help determine how much you have to withdraw from the account. All you have to do is divide the amount of money in the IRA by your life expectancy factor, and that should tell you what your minimum withdrawal will be.
You are allowed to take more than that amount, and sometimes, that’s a better strategy. If you take smaller distributions and then a larger one in year 10, you could end up with an enormous tax bill. So you might want to plan out the distributions you’ll take for the lowest tax liability overall.
Do you need help planning for your financial future? Contact me today to set up a meeting to talk about your goals.