The IRS has recently waived required withdrawals from certain inherited retirement accounts since 2020, which may not necessarily benefit the heirs, according to experts. Prior to the Secure Act of 2019, heirs were able to stretch out withdrawals over their lifetime, reducing their tax liability. However, under the Secure Act, certain heirs now have a shorter timeline to empty inherited accounts, needing to do so by the 10th year after the original account owner’s death to avoid penalties. The IRS has extended its relief for missed RMDs until 2024 to ease confusion around the rules.
The new rule under the Secure Act could be potentially risky for heirs, as they may be tempted to delay decisions by the waiver of the RMD penalty for 2024. This delay could lead to heirs needing larger future distributions to empty out the account within the 10-year time frame. With changes in federal tax brackets in recent years and potentially higher tax brackets on the horizon, it may make sense for heirs to start making withdrawals in 2024 to take advantage of lower tax rates. However, it is important to consider the entire financial picture and consult with a financial planner to make the best decision for inherited retirement account withdrawals.
The relief for missed RMDs only applies to certain heirs who fall under the non-eligible designated beneficiaries category, subject to the 10-year withdrawal rule. These beneficiaries do not include spouses, minor children, disabled individuals, chronically ill persons, or certain trusts. While the relief for missed RMDs offers some flexibility to heirs, they still need to adhere to the original 10-year deadline for emptying the inherited retirement account. This can pose challenges for heirs with sizable pretax accounts, as they may need to plan for larger withdrawals in the future to meet the deadline.
The changes in tax brackets introduced in 2018 and set to expire in 2025 have also impacted the decision-making process for inherited retirement account withdrawals. With lower tax brackets in effect, it may be advantageous for heirs to start making withdrawals in 2024 before the tax brackets revert to higher levels. Overall, it is essential for heirs to consider all factors, including tax implications, financial goals, and timelines, when planning for inherited retirement account withdrawals. Consulting with a financial advisor can help heirs navigate the complexities of these decisions and make informed choices.
The IRS waiver for missed RMDs in 2024 provides temporary relief for certain heirs who are subject to the 10-year withdrawal rule under the Secure Act. While this waiver allows heirs to delay withdrawals without incurring penalties, it also poses risks in terms of potentially larger future distributions needed to meet the 10-year deadline. Considering changes in tax brackets, financial goals, and personal circumstances is crucial in making decisions about inherited retirement account withdrawals. Planning carefully and seeking guidance from financial experts can help heirs navigate the complexities of these rules and make informed choices for their financial future.
