IRS has waived mandatory withdrawal for inherited retirement accounts!

The IRS has once again decided to waive the mandatory withdrawal for Americans who have inherited retirement accounts since 2020. However, experts caution that this might not necessarily be beneficial for the heirs.

Prior to the Secure Act of 2019, heirs had the option to postpone the withdrawals from inherited retirement accounts over their lifetime. This helped in reducing their tax burden on a yearly basis. However, the rules regarding required minimum distributions (RMDs) have changed, resulting in a shorter timeframe for certain heirs.

Now, certain heirs are required to empty the inherited accounts within 10 years after the original account owner’s death to avoid facing significant penalties. In 2022, mandatory yearly withdrawals were proposed by IRS if the original account owner had already begun distributions.

But, due to its complexity, the IRS has previously waived penalties for missed RMDs, and as of April 16, they have extended this relief for 2024.

“It’s so confusing. Even the IRS has to give people a break until they can figure out if [beneficiaries] are subject to RMDs or not”, said individual retirement account expert and certified public accountant Ed Slott, speaking about the 10-year rule.

This recent penalty relief only applies to specific heirs categorized as “non-eligible designated beneficiaries”, part of the ten-year withdrawal rule under the Secure Act, this includes heirs who are not a spouse, minor child, disabled, chronically ill, or certain trusts.

According to the latest IRS update, these heirs won’t face penalties for missed RMDs for inherited accounts in 2024. Although, they are still required to empty the account within the original ten-year deadline.

Edward Jastrem, certified financial planner and chief planning officer at Heritage Financial Services in Westwood – Massachusetts, says that it “could be a little dangerous because it is potentially just letting you kick the can down the road on making a decision“.

For heirs with big pretax inherited retirement accounts who have had years of delayed RMDs, they may need larger future distributions to meet the ten-year deadline and empty the account. According to Slott, depending on your tax bracket, it could make sense to start making withdrawals in 2024, especially with higher tax brackets on the horizon.

“Of course, you need to weigh your entire financial situation while planning for inherited retirement account withdrawals. It’s one of many moving parts”, Jastrem added.

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