In recent years, changes in IRA inheritance rules have created a shorter timeline for beneficiaries to withdraw funds from inherited accounts, potentially leading to significant tax consequences. Under the Secure Act of 2019, non-eligible designated beneficiaries must deplete an inherited IRA within a 10-year window. This category includes heirs who are not a spouse, minor child, disabled, or chronically ill individuals, as well as certain trusts. The IRS has also proposed mandatory yearly withdrawals for heirs if the original account owner had already started required minimum distributions (RMDs).
The waived penalties for missed RMDs may pose a tax problem for certain heirs, as they are still required to empty inherited accounts within the 10-year timeframe. This shorter window could result in larger distributions and higher-than-expected income for those years. While some beneficiaries may prioritize accessing the funds quickly for immediate expenses, it is crucial to understand the potential tax implications of these decisions.
With provisions from the 2017 tax overhaul set to sunset after 2025, individual federal income tax brackets could increase without intervention from Congress. Lower tax brackets, currently in effect until 2025, may prompt some heirs subject to the 10-year rule to make pretax withdrawals sooner. However, financial planner Edward Jastrem emphasizes the importance of considering other aspects of a client’s financial situation before making withdrawal decisions.
Before withdrawing funds from an inherited account, it is essential to assess unique client situations such as one-time windfalls from selling a business or a home, which could temporarily raise income levels. Additionally, considering factors like expected retirement dates and when to begin taking RMDs from personal retirement accounts is crucial in the broader context of a client’s financial plan.
Overall, understanding the intricacies of IRA inheritance rules and the potential tax implications for heirs is essential for making informed financial decisions. While accessing funds from an inherited account may seem like a straightforward decision, taking into account the impact on long-term financial goals and considering the broader financial picture can help beneficiaries navigate these complex rules effectively. By working with financial professionals and staying informed about changing tax laws, heirs can ensure that they make decisions that align with their financial objectives.
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