Since the passing of the Secure Act in 2019, non-eligible designated beneficiaries who have inherited an individual retirement account now face a 10-year window to deplete the funds. These beneficiaries include heirs who are not a spouse, minor child, disabled, or chronically ill individuals. This timeline can create significant tax consequences for the heirs if they fail to adhere to the regulations set forth by the IRS.
Challenges for Heirs
Experts warn that the waived required minimum distributions (RMDs) could pose a tax problem for heirs who still need to empty their inherited accounts within the 10-year period. The shorter window may result in larger distributions and higher-than-expected income for those years. Despite the potential tax implications, many beneficiaries are more focused on accessing the funds rather than planning for the tax consequences that may arise.
With the impending sunset of certain provisions from the 2017 tax overhaul in 2025, heirs may face higher federal income tax brackets in the coming years. This could prompt some beneficiaries subject to the 10-year rule to make pretax withdrawals sooner to potentially take advantage of the lower tax brackets currently in place. However, financial experts caution that tax law changes are just one factor among many that heirs should consider when planning for the future.
Certified financial planner Edward Jastrem emphasizes the importance of looking at the big picture when it comes to planning for inherited accounts. Factors such as selling a business or a home, expected retirement dates, and timing of RMDs from personal retirement accounts all play a role in determining the best financial strategy for each unique client. Jastrem advises that clients should prioritize these aspects over solely focusing on the potential tax consequences of inherited accounts.
Heirs who have inherited individual retirement accounts must carefully navigate the 10-year withdrawal timeline and consider the tax implications that come with it. While the waived RMDs and potential tax law changes may impact the decision-making process, it is essential for beneficiaries to assess their individual financial situations comprehensively. By considering all aspects of their financial plan, heirs can make informed decisions about when and how to empty their inherited accounts to secure their financial futures.