Advice Beyond Investments September 2022
Financial planning tips beyond our investment and market insights
Research Photo

Recent Changes to Inherited IRA Distributions and Tax Implications

The IRS has changed the way non-spouse beneficiaries are required to take withdrawals from IRAs they have inherited from the original owners who have passed away. In the past, non-spouse beneficiaries were allowed to draw down the balance of the inherited retirement account over their lifetime, using a factor determined by their life expectancy. For beneficiary IRAs of initial owners who passed away prior to January 1, 2020, this remains the case. This allowed the beneficiary to ‘spread out’ the payments fairly evenly over a long period of time in order to minimize the tax implications, depending on their age.

The SECURE Act of 2019 eliminated this option for most non-spouse beneficiaries. If the original owner of the IRA or other tax-deferred retirement account (401k, 403b, etc) passed away on or after January 1, 2020, then new rules apply for the beneficiary. Generally speaking, the new legislation requires the entire balance of the inherited IRA to be depleted within a ten-year window. As of this time, there is no annual requirement within that ten-year period. However, this continues to be a topic debated in Congress and future changes may keep the ten-year period in tact and also require an annual distribution along the way.

As of now, a beneficiary could wait until the tenth year of the mandatory withdrawal period and take a lump sum of the account balance at that time. This would save on taxes in the first nine years, but in turn, create a huge tax bill for the beneficiary in the final year (or whatever year the withdrawal is taken), depending on the value of the IRA account. 

We have encountered many clients who are faced with deciding the best course of action, and every case is different. For example, in some cases where a client is looking to transition into retirement, the required withdrawals need to be factored into that individual’s income planning in order to balance the tax implications of their current and future income sources (wages, social security, pension income). 

The income in these cases can actually provide a nice ‘bridge’ into retirement, allowing the client to hold off on social security income, pension payments, or withdrawals from their own retirement accounts. If done correctly, the new rules could play into the IRA owner’s favor. If all sources are not considered when making those decisions, the IRA owner could pay much more in taxes than necessary.

If you or someone you know is facing these decisions, please reach out to us to ensure the right decisions are being made.

Preferred Communication Method
Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.